I have seen too many instances where investors pursue the mania of the moment and wrong courses of action because they do not take the time to think critically about what has happened in the past, cautions Kelley Wright, editor of Investment Quality Trends.
The late Kenny Rogers in his song The Gambler, advised, “You never count your money when you’re sitting at the table, there’ll be time enough for counting when the dealing is done.” Wall Street, and those that follow Wall Street, spend a lot of time and resources ignoring this sage advice.
Every manic period in market history is based, to a degree, on investors looking at the pile of chips in front of them and multiplying them in their heads into the indefinite future.
Humor me for a minute. At some point massive federal deficit spending will come to an end. According to conventional wisdom the private sector will pick up where the federal government left off and take us to the next level higher.
Am I supposed to believe that the private sector will not only replace federal spending, which in and of itself would be a tall order, but add to it as well? For Heaven’s sakes, the S&P has already blown through all time valuations, including those of 1929 and 2000.
Miraculously though, we are supposed to believe that the private sector has been so thoroughly healed that the markets and economy have nowhere to go but up? Look, I get it, the trend is your friend, but no trend lasts indefinitely.
I know this is apostasy to those who believe the Federal Reserve has found the key to maintaining the indefinite boom. And to be fair, I vastly underestimated how investors and the markets would not only accept, but completely buy off on Quantitative Easing (QE).
Going back to, oh, I don’t know, forever, the markets had a limit of what they would accept in terms of extremes. This is to say throughout market history there was always a line in the sand that was too far to cross and the markets would correct.
QE has clearly put an end to any limitations on risk. Not only that, but it has made holding any asset with a negligible return, even one that is high quality and reasonably good valued, an anathema.
Investors therefore have chosen to pursue assets that under normal circumstances they would never consider because of the risk of loss.
That too is now in the dustbin of history because the Fed has their back. I was talking with a friend the other day whose curriculum vitae in technical analysis is off the charts ridiculous, just simply one of the best.
So, imagine my surprise when he starts to rattle off a series of fundamentals, which technicians rarely consider let alone talk about, that make absolutely no sense to him or me for that matter, and at any other point in history would have been that line in the sand that was too far to cross, yet are seemingly nowhere on the markets radar screen.
What really struck me from that conversation was this line, “Look man, I mean it’s like nobody even cares!” And there you have it folks, that is the answer, no one cares about extremes or risk of loss, because the Fed has their back.
As I was driving along the coast on my way home, I was musing on this notion and it occurred to me that markets rarely correct or crash on the unknown, they correct or crash when the known becomes real.
What constitutes real in today’s world? ‘70’s style inflation? Rapidly rising interest rates? Something tells me that when we discover whatever real is that we’ll know what it feels like to wake up in a mine field without a map. My guess is that it doesn’t end well.
Let me put this screed to bed with this, I have grave reservations that the chips in front of investors are going to multiply at the same rate as they have in the last year. Wait, this just in: “Mutual fund managers are positioning for “boom expectations.” See, the game isn’t over, but we clearly are no longer in the early innings.
Hopefully you will take from this missive what is intended, to pay attention. The Overvalued category now holds more stocks than the other three categories.
Overvalue means the stock has reached an historically repetitive area of low yield, which means the vast majority of the stock’s value has been realized. I know it is difficult to part ways with a position that has been held for an extended period.
We held McDonald’s (MCD) for sixteen years, 2003 to 2019, before it reached its Overvalued area. Four months after we sold, the stock declined to Undervalue in the Covid sell-off.
Did we know the stock would return to Undervalue in such a short time frame? Of course not, we just knew that it would at some point because that is the natural cycle of high-quality blue-chip stocks. Undervalue to Rising Trends to Overvalue to Declining Trends, rinse and repeat.
The concept is simple, but implementation is what is most difficult due to the emotional components we know as fear and greed. Over the course of her brilliant career Geraldine Weiss, the founder of IQ Trends, imparted many pearls of wisdom, one of which is, “Stocks are like streetcars, another one will come along soon.”
This is to say that once you understand how to identify quality and value you no longer need to fret about selling a long-held winner because you have the tools to pick the next winner. Trust the process.
Meanwhile, there are several new additions to our roster of Select Blue Chips that are currently undervalued: BancorpSouth Bank (BXS); Farmers National Banc Corp. (FMNB); Getty Realty Corp. (GTY); Northwest Natural Holding Company (NWN).
BancorpSouth Bank is a commercial bank headquartered in Tupelo, MS. The bank offers a range of financial services to individuals, local governments, and small-to-medium size businesses.
BXS continues to grow its footprint and has a long history of M&A being a key growth driver given relatively slow growth in its organic markets. For 2020, BXS reported record revenues with a 10.4% increase year over year. The company has paid uninterrupted dividends since 1945.
Farmers National Banc is a financial holding company that operates in the banking, trust, retirement consulting, insurance, and financial management industries.
It operates through 40 locations in northeastern region of Ohio and one location in southwestern Pennsylvania. The company was founded in 1887, is headquartered in Canfield, Ohio, and has paid uninterrupted dividends since 1990.
Getty Realty is the leading publicly traded real estate investment trust in the United States specializing in the ownership, leasing, and financing of convenience store, gasoline station, car wash and other automotive properties. Their 960 properties are located in 35 states. Dividends have been paid uninterrupted since 1995.
Northwest Natural Gas was founded in 1859, incorporated in 1910, and has two core businesses: the utility segment and the gas storage segment. NWN has paid uninterrupted dividends since 1952.