Author: Admin

An Investment Tool That’s More Important than Ever

The overall stock market performance during April was one for the record books. The Dow 30 (+11.1%) and S&P 500 (+12.7%) put in their best one-month performance since January 1987. The Nasdaq (+15.4%) delivered its greatest one-month gains since June 2000, and the Russell 2000 (+16.22%) outperformed the other three major market indicators.

The April rally was a welcomed reversal from March, which was the worst month since the height of the financial crisis in 2008. The question most stock investors are trying to discern now is, will stocks reverse again in May?  And How best to determine value?

Where to Now?

The economy and its impact on the stock market are in extraordinarily uncertain waters. Any previous trends have all been derailed. This is not just true of the market overall, but also true for both companies that will benefit from the pandemic and the majority which will be hurt by it. One fact that will keep many self-directed investors active is the reality that, during times like these, opportunity is at its highest. It is also true that at times like these the risk of short-term realized or unrealized losses are also at a high level. Volatility, truly is a double-edged sword.

Many market participants are accustomed to companies earnings guidance and earnings forecasts, especially in highly capitalized corporations that are widely covered by sell-side analysts. The quarterly forecasts of these companies are so broadly covered by mainstream news outlets, that they’re sometimes treated and delivered to investors like they’re an event themselves. The problem now is, over the past few weeks analysts along with one company after another have pulled their guidance and stated, “we just don’t know.” This takes away one of the valuation tools investors use in their decisions to buy or sell.

For the companies part, they can not offer the earnings insight into the near future which they do not have. This is safe for them to not offer numbers with far less confidence than the market is accustomed to. Without the companies insight, analysts from both sell-side Wall Street firms and company-sponsored research have placed many companies near-term projected revenue in a wait-and-see mode. The analysts, oddly enough, probably have better visibility out a year or more when the crisis is presumed to be behind us, than they have out three months. This may not be as much of a drawback for investors as it feels.

Investors, enjoy experiencing immediate gratification and reassurance after investing in a company. However, it is long term results (longer than 90 days) that is most often the reason an investment is made in the first place. Similarly, as far as selling,  a long-term negative outlook makes more sense than ridding your portfolio of a company because they are having a one-time hit to EBITDA.

Perhaps the economic lockdown will usher in an era of companies managing for long-term results. An era where analysts don’t feel a need to be as precise about their immediate estimates of income as opposed to longer-term prospects for the company and space in which it does business. Investors for their part could serve their future financial growth better if they look at companies through a longer-term lens. This would allow corporate management to create strategies with a longer-term focus.

Determining Value Now

Lower expectations of forecasting precision over the next two periods from the company’s investor relations or research analysts will be important for investors that want to stay involved and feel comfortable. By definition, people invest for the future, value expectations over a more appropriate time horizon may be the answer to this lack of information. Even during ideal times, it would be foolhardy to invest cash in a stock if you need that cash in a few months. A longer-term focus is more prudent for investors, and if companies are given leeway to focus long-term they should be able to make decisions that drive better results. This is better for investors and there are still forecasting tools. In fact, there are plenty of other fundamentals to review as a measure of future positive performance.

One thing the pandemic has done is cause us to see shifts in the economic landscape that may change industries. Some areas have earned a lot of buy-side interest because of the virus and lockdown and what it might usher in. Recognizing these changes early could be the key to finding performance and benefiting from the new paradigm. These could include industries providing work from home solutions, medical solutions, and safe havens such as precious metals, among many others.  Once industry expectations are recognized, sort through high-caliber industry reports to make sure you aren’t missing anything. From there, find companies within the space and check the recent price trend; you don’t want to chase after a stock that perhaps has already received too many speculative investors. Then comb through institutional-quality research analyst reports to get a clearer picture of the inner workings of the business model and growth prospects. Narrow down the list of possibilities and hope to find the deserving company that has been overlooked in all the other noise.  

Time Horizon Adjustment

The regularity of earnings projections with what had been a short feedback loop provides a sense of control and precision regarding accuracy, but perhaps not usefulness of these forecasts. Even with today’s murky conditions, wide estimation error, or lack of short-term guidance should not be a problem for investors. We know there is a temporary problem. If it were possible to forecast next quarter’s earnings per share for every stock in the S&P 500, any partially astute investor would assume that each companies profits this year are not representative of their longer-term potential. To put it another way, the accuracy of any earnings forecast during the first half of 2020 does not make it a valid measurement for determining normal expectations for the company. Companies that miss estimates can still have great earnings prospects. Conversely, companies that exceed expectations could still face difficulties. Within the past two months, and looking through next quarter, what is going on within the company books, within the various industries, and management goals to drive better performance can hardly be fully assessed by most self-directed investors or small RIA firms. They need more information and deeper insight on industries and company-specifics. The business model itself could be more telling than the numbers. 

Without a crystal ball, we don’t know how “normal” next year will be. However, as an investor, we should try to take advantage. We know the focus should be longer-term. As far as Wall Street analysts are concerned, the direction of future numbers and ability to resume normalcy down the road provides a very good start to discerning where assets should be deployed and which investments are best sold now. Looking out beyond the immediate quarter reduces short-term “noise.”  It also creates a longer-term horizon for management to measure success. Three years, five-years, ten years, these seem like an eternity in a world where immediate expectations drive stock price, and stock prices are available and rapidly changing throughout the day.  But if your investing for a future measured in years, you may be surrounded by opportunities that you’re afraid of taking advantage of because you aren’t as certain what will happen over the next 90 days. This will work against your success in the new paradigm.

 

Paul Hoffman

Managing Editor

 

Suggested Reading:

Stock Index Adjustments and
Self-Directed Investors

The Case for Silver

Small-Cap VS Large-Cap Investing

 

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Sources:

Strategies
for Quarterly Earnings

Has Warren Buffett Already Shown His Hand?

Market participants, of all levels, have been wondering aloud about Warren Buffett’s low profile. Shortly after other wealth destroying market events, the “Oracle of Omaha” tended to step-up and calm fears early in the financial turmoil. The orchestrated economic stoppage of today’s lockdown has left investors wondering. They’re wondering if and when they’ll get a glimpse into the thinking of the highly respected Chairman of Berkshire Hathaway. Well, they don’t have to wonder much longer. His “silence” will end Saturday (May 2) at the Berkshire Hathaway shareholder meeting (held virtually).  The discussions from that meeting have the potential to set the market tone in a number of industries and even the overall mood.

Has He
Already Shown His Hand?

Reviewing his actions and experience after the financial bubble burst late Summer 2008 may lend clues into his current focus. There was an excellent op-ed article written by Buffett for The New York Times just one month after the recognized start of the 2008 financial crisis. The piece was titled “Buy American – I Am” and contains one of his most famous quotes; “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” The article uses market history to make compelling arguments for ignoring fear and to confidently move cash from the sidelines and into the market. The only problem with the article, at least according to the author himself; is, he was wrong.

The Oracle of Omaha used the op-ed to “cheerlead” for the country and the markets. He wrote about taking his personal account from 100% U.S. Treasuries to making significant investments in U.S. Companies. The piece helped calm fears and served to inspire others to be comfortable investing while the extent of trouble was not fully clear.

Berkshire Hathaway, in 2008/2009, for its part, took large positions in beaten-up companies with excellent brands and excellent histories. The investments back then included Harley Davidson, General Electric, Tiffany & Co, and construction materials giant USG, among others. When discussing the crisis many months later, Buffett had lamented his timing and said he wished he had written his op-ed later than he did. He had spoken too soon.

This (jumping in early) by itself could easily explain his now shying away from making any bold statements. He is famous for confidently investing when others are fearful, but it is difficult to know when fear is near its peak. In 2008 he expressed extreme optimism only one month after the start of the market crisis. He was reminded that one month is too short to assess a new and highly unusual situation.

Charlie Munger, Warren Buffett’s business partner and Vice-Chairman of Berkshire Hathaway, spoke with The Wall Street Journal a week ago. He was very clear as to what was going on in the Berkshire Hathaway investment mindset and the deals coming their way. In short, he made clear, “The Phone Is Not Ringing Off the Hook.” 

The Vice Chairman also said, “Warren wants to keep Berkshire safe for people who have 90% of their net worth invested here. We’re always going to be on the safe side. That doesn’t mean we couldn’t do something pretty aggressive or seize some opportunity. But basically, we will be fairly conservative. And we’ll emerge on the other side very strong.”

Munger also noted that they generally don’t go out searching for deals with companies. In the past, corporations looking to discuss their situation came to them. He said large corporations are most likely having those conversations with the U.S. government. Certainly, the U.S. has deeper pockets and greater ability to help than Berkshire Hathaway. 

What Others are
Saying

The speculation and consensus among investors is that he is quietly deploying capital and selectively buying shares of companies that are the backbone of America. In a podcast for The Knowledge Project titled “Getting Back Up,” Bill Ackman, CEO of Pershing Square Capital Management, discussed what he thinks Berkshire Hathaway may be doing and should be doing. In the podcast, Ackman is heard saying: “I’m surprised they haven’t done anything yet that’s visible, but my guess is they’ve been buying stocks a lot…” The hedge fund manager added,   “The big opportunity for Berkshire is Berkshire itself.”  He explained it was a “cheap stock” before the market route and now is a “real bargain.” Class B shares of BRK (BRK-B) closed Wednesday at $189.61.

Rest Assured He Will Be Comforting

If history offers any indication, Warren Buffett believes markets always come back. As an “oracle” his projections usually have a soothing mood of confidence. This is not to suggest that anyone should believe the markets have seen their worst, or that everything will perform equally. Instead it would suggest there are many bargains within the equity markets, but the strength of the overall market may have gotten a bit ahead of itself.

As far as thoughts he shares on sectors and industries within the market, the investors will be listening for tips relative to performance spreads between stock classifications, which industries he sees value within, and if he is more likely to be looking offshore this time.

The normally lavish Berkshire Hathaway Annual meeting will be held virtually for the first time. It has been announced that Charlie Munger, who is 96, will not be attending. You can “attend” yourself on Saturday with this live stream this link.

Suggested Reading:

“The Big Short” Dr.
Michael Burry’s Views on the Shutdown

Why Index Funds Could be
a Mistake in 2020

What Now? Post Pandemic
Stock Market Investing

Register for Channelchek Premium Content and Tools at No Cost!

 

Sources:

Berkshire Hathaway 2020 Meeting Press
Release

“Buy American – I Am” NYT, 10/16/08

Charlie
Munger: ‘The Phone Is Not Ringing Off the Hook’

Bill Ackman:
Getting Back Up