Don’t follow headlines are so called market experts, follow the data, says Landon Whaley.
This week’s “Headline Risk” focusses on the outdated and dogmatic way the Old Institution “analyzes” stocks.
Mike Santoli on CNBC recently summed up the lack of economic understanding that goes into the vast majority of “analysis” that is spewed by the media.
To begin, this guy is categorizing stocks into categories like “open to flattery,” “elite and in charge,” “a party thins out,” and “the in-crowd, all in.” The first thing media and Wall-Street types do is discuss the analysts’ ratings for the stock in question, and Santoli is no exception.
His first bullish point about Visa (V) is that 90% of sell-side analysts have a “buy” rating on the stock, and if they love it, you should too! Maybe Mike should read last week’s report, where I discuss how 99% of all U.S. listed stocks (with analyst coverage) have either a “buy” or “hold” rating. So, the fact that every analyst and their mother think Visa is a “buy” isn’t groundbreaking news, and it's certainly no reason to be bullish on the stock.
Santoli’s second bullish point is that there is currently a “decent spread” between the average analyst target price for Visa and its current price. Anyone who’s watched markets for longer than six minutes knows that Wall Street analysts aren’t pro-active when it comes to stock coverage, they are very much reactive. Analysts creep their targets higher as the stock moves higher. This follow-the-leader approach to setting target prices is evident in the Visa chart Mike references at the 23-second mark.
The Wall Street bottom line is that analysts love (carry a “buy” rating) just about every listed stock in this country and believe the best (higher) prices always lie in the future. Use analyst insights as part of your investing process at your own peril.
The third and final leg in Mike’s bullish stool for Visa is an Old Institution favorite, valuation.
Now, regular readers know how I feel about using valuation as a core component of an investing process. For today, it’s enough for you to know that while I don’t wholly abhor the concept of valuation, I do think it’s the equivalent of using the Super Bowl to determine the stock market’s direction.
Back in the 1970s, Leonard Koppett put forth the notion that the Super Bowl winner could accurately predict the direction of the S&P 500. If the AFC won, the S&P 500 would lose ground the following year, if an original NFL team won, the S&P would gain the following year. The indicator at the time Koppett first wrote about it had a 100% success rate, as of last year, it dropped to 80%, closer to 50% since it was enumerated. The indicator is the poster boy for the truism, “Correlation does note imply causation.”
For those believing valuation is a reliable predictor for future stock prices, check out the performance of John Hussman’s (Dr. Valuation) “Strategic Growth Fund,” which has lost money over the last one, three, five, 10, and 15 years. Even during last year’s “everything including the kitchen sink” rally, this guy’s fund lost 19%!
Now that we’ve highlighted the wrong way to go about finding stocks to buy, I’ll tell you the right way to do it (and yes, there is a “right” way). The only data-dependent, process-driven, and risk-conscious way to find stocks worthy of ownership is to start with a universe of companies based on the current Fundamental Gravity.
Given the prevailing Fall Fundamental Gravity and the coming Winter, there are only three equity sectors worthy of your attention: Utilities, REITs, and consumer staples, in that order. Further, from a style factor perspective, you’ll want to focus your attention on those companies that are low beta with juicy yields and treat high beta stocks and small caps like they are carrying the bubonic plague.
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