Albert Speaks

      Growing up one of the most influential people in my life was my maternal grandfather Albert Marx. Albert was a product of the Great Depression. It changed him in many profound ways for the rest of his life. He became very frugal because he knew firsthand what it meant to not be able to provide for his family. He learned the art of self-help because there was a time when he couldn't afford to hire anyone to help him. He learned the value of his faith because there was a time when that is all he had. Albert learned to save a little money (even though it was pennies) because he knew that what happened to him in 1929 could happen again. Albert lost his farm in the Great Depression. He ran the first commercial dairy business in Evansville and that also went into foreclosure. His four daughters were sent to live with relatives because he could not afford to feed them. His wife Olivia, a sickly but spirited woman was forced to clean houses for people just to survive. Through it all, Albert never lost his faith, his sense of family, his identity, his generosity, and his sense of humor. His perseverance is what I found admirable. In his latter years, I consulted with him before making any major life or financial moves. Having someone with his experience was a great asset for me while growing-up. Albert liked to play the ponies, (every day). He only bet the $2 minimum on each race and his favorite saying was "It won't make me or break me". At the end of each week, he would make a trip to his bookie and settle up, and he would collect all the racing forms from him to sell as scrap paper. When Albert died, he had 10,000 pounds of paper in his garage to sell. He was waiting for the price to increase but it never did. Albert's house was built on a lot only 25 feet wide, but he still managed to plant 100 tomato plants in his backyard and grow cucumbers on the fence. He shared his harvest with all the neighbors on the block and also bought them groceries when they couldn't. I think about him sometimes when I am placing my limit orders for a stock I want to own. I never buy so much that it would break me if it went bust and one individual order won't make me if it did well. But over time many different stocks, bought at reasonable valuations, can be very rewarding. Even though Albert never fully recovered from the Great Depression, the lessons he taught me have paid off handsomely.

 

 

 

 

 

 

 

 

 

 

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It Pays to Check the Oil

      About 20 years ago, I bought my wife a new riding lawn mower. It was one of the best available at that time with a 21 horsepower engine and automatic transaxle. She loved that mower and used it often, keeping our yard the pride of the neighborhood. I always nagged her to check the oil in the engine each time she used it but she seldom did. One day, shortly after starting to mow, it made a loud noise and died. When I inspected it I found the engine was out of oil and the connecting rod was protruding from the crankcase. Oil is a must for any internal combustion engine, ignore this and disaster will ensue. Our economy also is reliant on oil and it's byproducts like gasoline, jet fuel and diesel fuel. Many people in rural areas heat their homes with heating oil. The recent ransomware attack on the Colonial Pipeline which supplies gasoline to the east coast of the US was a reminder of just how reliant we are on oil and its distillates. I recently counted 22 different gas engines that I own for transportation, recreation, lawn  maintenance, emergency electricity, and gardening. With the advent of electric vehicles, the oil industry has been under pressure for the last 10 years but I believe that there will not be a wholesale conversion to electric power during my lifetime. The internal combustion engine is just too ingrained in our lives to vanish quickly. Since the oil industry is so volatile, I do not have a "buy and forget" mentality about it. Over the past 30 years I have been in and out of names like Schlumberger, Halliburton, Chevron, Royal Dutch Shell,  Marathon Petroleum, Phillips 66, and Valero. Each of these companies have a niche in the industry and should be considered on their individual merits. I like the last 3 listed because they are the refiners of oil and supply us with the finished products that we need in our everyday lives. The barriers to entry into the refinery business are very high for obvious reasons which creates a moat, giving these companies a near monopoly. It also helps that they pay generous dividends while you wait for price appreciation. Schlumberger provides technology to drillers to streamline their operations and make wells more productive. New technology always takes longer to roll-out than expected so I think gas engines will be with us for the foreseeable future. It still pays to check the oil.

A Lesson From Uncle Earl

      Many years ago, my Dad's brother, Earl, came to town from his home in Florida to visit his mother. Earl liked to invest in stocks so I made it a point to meet with him to get some insights into where he was putting his money. To my surprise, Earl told me that he was investing in companies located right here in Evansville, In. With a whole world available to him, he liked this small town in the midwest for his investable dollars. In those days Evansville was a manufacturing mecca. We had heavy industry like Alcoa, Arkla, Whirlpool, General Electric, Meade Johnson, Bristol Myers, and a very robust plastics industry. A byproduct of the plastics industry is many small machine shops that made and repaired molds for plastic injection machines. The end result was a skilled workforce able to keep the wheels of industry turning and a strong work ethic that was inherent in their DNA. Earl stated that some of the best investments are right here under my nose and I didn't even see that. Over the years, local conditions have changed. Many of the industries left and moved production to countries where labor is much cheaper. Some companies have sold or spun-off divisions to streamline their operations. Like the rest of our country, there has been a shift from a manufacturing economy to a service economy. As our local economy changed, I invested more in large companies with global operations but I never forgot what Uncle Earl taught me. Currently, my large-cap stocks are trading at lofty multiples as measured by the P/E ratio. There is also a movement to relocate our supply chain back to America. The problems of relying on foreign sources, especially China, for critical components are obvious now. Also small cap stocks are currently in favor again after many years and so is value investing. Add it all up and it makes sense to take Earl's advice now and look locally for opportunities to make money. Regional Banks are making money on mortgages, higher interest rates, and a surging economy, the plastic industry has a local powerhouse in Berry Plastics, we still have a presence in the pharma industry, and metals are again in demand due to the reopening. Most of these local stocks have performed well so far this year but still trade at very reasonable valuations and they are right under my nose.

Walk On Hot Coals

      In 1973 Rory Gallagher recorded this song on his album "Blueprint". It contains a high energy guitar solo that I loved to listen to as a younger man. Few young people have ever even heard of Rory today, but his music lives on in my memory even though he died way too young. The song reminds me of the stock market environment today. I say this because the market is undergoing a rotation from some super high valuation growth names into some left behind value names. Only a few weeks ago stocks that represented the "stay at home" economy were the darlings on Wall Street but now their sky high valuations are being questioned. The reason is that with so many people who are now vaccinated, the stay at home economy may be slowly coming to an end. One sign of this is the volume of air travel which is approaching levels not seen since the pandemic started. This creates a very treacherous investing environment. Stocks like Netflix and Peloton have already started to slide downward because they were the beneficiaries of the lockdown. So what should an investor do? First, take baby steps when adjusting your portfolio. Making bold moves rarely ever paid-off for me. If you have nice gains in pandemic related stocks, it would be wise to take some money off the table. New money deployed into this market should be directed at the reopening of our economy, especially if the valuation (PE ratio) is below the rest of the market. Also never forget about dividends. Over the last 75 years, dividends have accounted for a large part of the overall return of stocks. I am not ready to turn tail and run from the stock market into fixed income like bonds or CD's. The reason is that yields are still so low that after the effect of inflation, you are guaranteed to lose purchasing power for your money. Stocks are still the only game in town but the game has changed a bit. I still like financials like banks, pharma, materials, and old tech companies that have not participated in the mania of the last 18 months. Pay attention to valuation, dividend yield, earnings growth and sales growth to keep from getting burned.

I HEARD IT THROUGH THE GRAPEVINE

      This song was without a doubt the biggest hit of Marvin Gaye's career. In 1967, Gaye recorded it on his "In the Groove" album which was released in 1968. Once radio DJ's began to play the single, it became a #1 on the Billboard Pop Single chart for seven weeks. Gladys Knight and the Pips also recorded "Grapevine" in 1968 but Gaye's version became the bigger hit and outsold all others. The grapevine or rumor mill is a great place to gather information about relationships and personal info about people but a terrible place to get investment advice. I bring this up because of the recent activity on the social media site Reddit. Young people who have absolutely no previous investment experience are openly touting stocks of questionable companies like Gamestop (GME) as promising investments. Gamestop is a video game retailer with about 5500 retail stores. Many young people have had a relationship with the company because they grew-up visiting the stores, testing new games and sometimes even buying them. They have an emotional connection with the company and now also with the stock, even though the business is in serious trouble due to internet sales, the pandemic, and changing consumer behavior. Admittedly, GME has seen volatile swings in price recently, creating profits for some and big losses for others. Some of the Reddit users still believe that they alone are causing this volatility in the stock but large institutional investors have joined in to benefit from the action. Buying a stock without doing any research is like making a bet on a roulette wheel, it seldom works out for the benefit of the bettor. With so many quality companies to choose from there is no reason to focus on one failing company. At some point, this memme stock fad will fade and GME will succumb to market forces based on fundamentals. It's OK to listen to rumors of great stocks but its not OK to buy on others recommendation alone. A little research will identify whether this stock is appropriate for your portfolio. Tools like ratio analysis, valuation comparison, debt analysis, and technical analysis will go a long way to help make the decision to pull the trigger. All these tools are discussed in earlier posts here on Moneylizard. I love the fact that so many young people are getting involved in stock investing but its disturbing that they are not performing any due diligence before buying. Finally, one should never buy or hold a stock for emotional reasons, its about the money.

I DON'T LOVE YOU ANYMORE

           In1964, Charlie Souvin recorded this song about a lover who cheated on him. He qualified this by singing that he didn't love her any less. This reminds me of the love affair the stock market has been having with some fast growing stocks lately. For the past week, investors and traders have fallen out of love with these names, so much so that the NASDAQ exchange has entered correction territory by declining about 10%. Wallstreet darlings like Facebook, Apple, Netflix, Amazon, Tesla, and many other tech companies have been taken to the woodshed and spanked. Corrections are a natural method for an overheated sector to return to more earthly valuations. It should not suprise anyone who even casually watches this market that some of these tech stocks have gotten ahead of themselves. Some recent IPO's are currently trading at price/sales ratios in the thousands or more. I realize that young companies need capital and may not be profitable for years because building a business is expensive but for every one that becomes successful and profitable there are a hundred that fail. I will leave that huge risk for others, there are too many profitable companies that trade at reasonable valuations for me to invest in. While the NASDAQ is tanking, the Dow and S&P are going up. This tells me that a rotation is underway where Financials, Industrials, and Cyclicals are in demand. There are several reasons for this change of sentiment: First, interest rates have recently gone up dramaticaly on the long end, second, the huge amount of liquidity in our economy has created a bubble in the tech sector, finally, there is a movement toward value stocks vrs growth stocks. I have always been a value investor at heart. Dividends and a below market P/E ratio are important to me. Unfortunatley, value has been out of favor for a long time, however, it is coming back strong. I have to admit that I have fallen into buying some growth names just to participate in this bull market but after this week, I don't love them anymore.

Thank God It's A New Year!

 Just like some people are thankful that its finally Friday, I am very happy to put 2020 to bed and start off a new year. Even though 2020 was spent cooped-up like a caged tiger, it was very profitable to those who had a diverse basket of stocks and fixed income. First I will look at what I did right and then I will look at what I got wrong. My winners included some tech names like Tesla, Lam research, Micron, and others. Home builders were also strong with a 27% return on average. Financials ended the year with a 1.6% loss but have been very strong in the last few months, racking up a gain of 28%. Small cap stocks only did a measly 2% for the year but they also have come on strong over the last few months to return 35% as of late. I was correct to assume that interest rates would remain unchanged which gave stocks a tailwind because of a lack of alternatives. What I got wrong was that energy stocks would finally start to perform better. I was completely blind-sided by the Covid 19 virus even though I am convinced that when I wrote my 2020 forecast, I might have been suffering from it. Looking back, 2020 was by far the most profitable year I ever had as an investor. Looking forward, I want to try to hold on to the gains of last year. I have no doubt that a mild sell-off in stocks is in the cards for us but I think it will be short lived due to the massive amount of capital sitting on the sidelines, waiting for a chance to buy growth names at a discount. I also believe that value investing will gain some traction in 2021 because many good companies did not participate in the 2020 gold rush. One of my favorite ideas going into 2021 is bank stocks and other financials for reasons listed in my previous blog titled "Buy The Bank". With a vaccine roll-out, however flawed, and a slow reopening of our economy, there will be many opportunities to profit from stocks in depressed industries like travel, casinos, hotels, airlines, and entertainment. The growth names of last year will continue to perform well going forward, especially some tech names due to the 5G rollout and a shortage of chips for electronics and the automotive market. Even all major home appliances have silicon chips in them nowadays. I am in the process of downsizing and decluttering my portfolio currently by selling some individual names and replacing them with ETF's representing my investment themes. This is a more targeted way to invest while diversifying within sectors. My biggest fear for the future is inflation. Interest rates are inching up, and when this economy opens again, the demand for goods and services may exceed supply, causing price increases,