Belated Mid-Year Forcast

      My mid-year review is a little late this year due to several things: first, the covid 19 is a wild card that changes everything; second, family medical issues has taken-up much of my time; third, my garden harvest was in full swing when I actually jotted down my review. As I write this, the second wave of covid 19 is in full bloom, yesterday marked the highest number of deaths so far in the pandemic. However, every day we inch closer to a vaccine and therapeutics, both which lessen the impact on our economy. We are also getting closer to an additional stimulus package because the election is just 2 weeks away and the holdup has been purely political. I still feel like stocks are the only logical place to invest now because interest rates are so low and likely to stay that way for a long time. If we do see a market correction, there is over 3 trillion dollars sitting in money market funds waiting for a chance to buy stocks at a discount. This compares to 673 billion dollars just one year ago. Therefore, I think pent-up demand will propel stocks higher in the near and intermediate term. As I mentioned in my last post, I am buying a few growth names like Zoom Video (ZM) and Snap (SNAP) and adding to some long-held positions like Intel (INTC), IBM (IBM), and Pfizer (PFE). This strategy combines growth with value and income from dividends. I have come to realize that there are some publicly traded companies who will change the way we work, travel, shop, and play. The key is to recognize them and jump aboard before the big run-up in price. I think Snap will be a game changer because it will allow consumers to "try on" products like make-up, glasses, and clothes virtually. What was once just an annoying playful app will become a useful tool in the future. The lesson here is that just because a technology hasn't been monetized yet, it probably will be at some point just because of its popularity. I can remember when Facebook, Google, and Amazon were not recognized as money printing machines. Finally, a lesson on why every family and individual should have a healthy nest-egg in a non-retirement account. Even though I consider my family well insured against any medical issues, my wife has entered into a course of treatments that are not currently covered by any of my three carriers of health insurance. Fortunately, we have saved and invested for this unexpected event so that she can get the care she needs without any financial hardship.

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Partly Cloudy With a Chance of Profit

    T'he weather reporters in this area of southern Indiana are good at telling us what the weather was like on any given day but not so good at predicting what the weather will be in the future. Usually, today's weather in St. Louis is what we get tomorrow but that is not always the case. The stock market this year has me feeling like one of our weather forecasters. Things are just not like they used to be. This year, stocks have consistently gone up on almost a daily basis. The up and down volatility that I'm used to just hasn't been there for me to get my limit orders executed. Therefore the stocks I wanted to own have moved dramatically higher without me. In short, the market has been so predictable, it has fooled many investors who like to trade on dips due to normal market volatility. The reason for this upward action is fairly simple, interest rates are so low that investors can only find a return in stocks. Many people are waiting for a chance to deploy money into stocks, hoping for a 10% or more correction. That just has not happened (yet). Fundamentals simply do not support the rapid rise in some of the growth stocks like Tesla, Apple, Facebook and other tech stocks. Anyone wanting to own one of these highflyers in this market must just buy at market and hope for the best. Since March, that has been a winning strategy. I have recently cleaned up many of my buy orders because they are not even relevant anymore. If I would have just bought at market, I would have made a bundle. I can't argue with the success some investors have had by just picking an overvalued highflyer and jumping on board but I find this behavior reckless. How long can this go on? Probably longer than I think because interest rates will not increase anytime in the near future as stated by Jay Powell, the chairman of the FOMC. In summary, my old school method of placing limit orders to buy stocks just does not work in a market like this one and it has cost me dearly. Even though my existing holdings have appreciated with the averages, very little new money has been deployed. I have now recognized that the market has changed (for now) and so must I.

 

The If-Then Conditional Statement

     In mathematics, a conditional statement is a form of logic that forms a hypothesis followed by a conclusion. Over my years of investing I have developed several if-then statements that could have yield big gains in one or more stocks. An example from long ago was that a particular tech company was experiencing large losses in a division outside of their main product line. My conditional statement read like this; "If company X sells off their PC division, then their earning and stock price will rocket up". I owned the stock but could have made lots of money by loading up on company X. I bring this up because at this time an opportunity may exist that could make some astute investors very wealthy. The U.S. economy is in the worst shape in its entire history by almost any measure, and some experts are saying that it is going to get worse before it gets better. We are experiencing the worst health crisis in over 100 years and the economic fallout may be even more damaging because of the corona virus. In this modern age of technology and medicine, we have become helplessly victimized in the space of just a couple of months. So what is this opportunity? What will return us to a more normal way of life where we can assemble in large crowds, board airlines, take cruises, and enjoy eating and drinking in restaurants again? In my opinion the answer lies in a safe and effective vaccine. I am looking at some of the hardest hit industries and setting a price that I am willing to pay for their stock. Before the latest earnings reports, some of the cruise lines, airlines, and gaming stocks were selling for bargain prices. Therefore my conditional statement looks like this; "If a vaccine is available this fall, then these companies will return to their previous valuations". I have counted over 10 large companies racing to develop this vaccine, with some in late stage large scale trials. I am betting that one or more will emerge with an effective vaccine. While any one of the pharma companies that develops the vaccine will be hailed as a champion, I have doubts about the financial gains such a cure will bestow on them. Holding all of humanity hostage for financial gain would be a reputational risk too large for most any company. Therefore the real beneficiaries will be those companies within industries hardest hit by this pandemic.

Light My Fire

     "Light my Fire" was recorded by the Doors and sung by Jim Morrison in 1966. It was released as an Album in 1967 and the single soon turned gold in Sept of 1967. The song was rerecorded by Jose' Feliciano in 1968 and it too rose to #3 on the Billboard Hot 100 chart. I've been thinking about this song because there are some stocks I own that need to have a fire lit under them. They just can't seem to get any traction in this hot market. One of these is Cisco Systems (CSCO). I have owned this stock for a long time but I will not give up on it. It is a core holding for many large mutual funds and ETFs. CSCO currently sells for about $46.5 and trades at a reasonable multiple of about 17X. It pays a decent dividend which yields over 3%. Cisco produces switching equipment for the communication industry and is recognized as a supplier of quality and reliable goods. They also are into cyber security software and video conferencing technology which is in great demand during this pandemic. One competitor in this space is Zoom Video  (ZM) which pays no dividend, sells for $276/share and trades at an astronomical 1525X earnings. Many people are using the free version of Zoom which from what I am hearing is a very good product. The hope is that at some point businesses will convert to the paid version and Zoom will increase profits  which should lower the PE ratio. The market cap for ZM is about 78 billion while CSCO's is 197 billion dollars. Remember, the market cap is the total number of shares times the share price. Cisco's market cap is supported by many years experience in telecommunications, software, hardware and security software. while Zoom's market cap is supported by a very bloated stock price. Who will win this video conferencing war? I wish I knew but I intend to hedge my bet on Cisco by picking up some ZM at a lower price in the future. This same scenario is playing out in other industries such as pharma, food, fitness, and many others where young upstarts threaten older, established companies. In my effort to concentrate my holdings to some low risk investments that pay rich dividends, I want the companies I pick to stay relevant even when this pandemic ends. Therefore, I will be adding to my position in Cisco in the hopes that some of the heat from the competition will ignite Cisco's stock.

ON THE HUNT

     My wife has a nephew named Tony and his hobby is hunting snakes. He recently posted pictures  on facebook showing him holding a copperhead that he caught and released. I've been hunting recently myself, but not for snakes. I avoid any contact with snakes because they scare the hell out of me. My hunt is for stocks that may be undervalued in this pricey market. Tony has to work hard to find his quarry who hide under dead logs in the forest, then he pounces on them when the time is right. I am working equally hard to find my quarry, but I don't even have to leave the house for my hunt. The first method I employ is to review my existing portfolio to see if any positions should be enlarged. Sometimes the best opportunities are right under your nose. When that job was done, I copied a list of 5 star rated stocks from CFRA and began to research each one for valuation, dividend yield, dividend payout ratio, beta, earnings and debt load. Any stock that met my qualifications must also fit the theme that I have for the future. My theme is developed twice each year. In it I postulate what the economic conditions will be for the next 6 months and longer. I try to select stocks that will benefit from the trends that I forecast. Even if my forecast is not completely accurate, and it seldom is, my stocks have a decent chance to do well because they pay dividends and are trading at less than the rest of the market. This year's mid-year forecast has been delayed due to the unusual events that have taken place since  January. The Corona virus has completely wrecked my forecast for 2020 but that is why I have a reforecast in June. It gives me a chance to get it right after some unexpected events. Unlike Tony, I haven't caught anything yet, but I have a long list of stock orders set to be executed at the right price. In the end we both want to avoid getting bit.

Don't Fear the Reaper

     In 1976 Blue Oyster Cult recorded this song as part of the album " Agents of Fortune". The guitar riffs and harmonies are some of the best of that era. Some people mistakenly took the lyrics as an invitation to suicide but they were actually written by guitarist Donald Roeser after a health scare and his desire to be reunited with his wife in the afterlife. His reference to 40,000 lives lost everyday was a rough guess and was off by about 100,000 for that time. The fact is that we ALL are going to die at some point and this song just recognizes that. The current pandemic has taken many more vulnerable people from us than normal but the fear of the virus has paralyzed most economies in the world. After 10 weeks of isolation, many people are willing to risk contracting the virus just to resume a normal life. As our economy slowly reopens, going to a restaurant, movie, or barber shop is enticing. What will take longer to recover is businesses where many people are crowded into confined spaces like airlines, casinos, cruise ships, sports events, and concerts. What will give people confidence to partake in these activities again?  My guess is that an effective vaccine given to everyone possible will allow these industries to thrive again. Many very smart people are hard at work right now trying to make it happen-and they will. The only question is when it will happen. My hope is that by the end of 2020, a vaccine will be available for covid 19 which will get the world back on track. It does not matter to me who develops the vaccine as long as it is safe and effective. The money will be made on the previously mentioned industries most damaged by this disease. Maybe I'm crazy but getting a 75% discount on Carnival Cruise Lines right now is starting to look like the kind of opportunity that interests me. My thinking is that when most of the world's people get innoculated, the young and fearless will return to all that is normal for them.

RESPECT

     Aretha Franklin recorded the song "RESPECT" in 1967. It soon became her signature song. Anyone with a pulse can't help from grooving to this tune when it comes on the radio. Originally recorded by Otis Redding in 1965, the song lyrics demand respect from the singer's lover. Somebody else who made a fortune complaining that "I don't get no respect" was my favorite comic, Rodney Dangerfield. Just like Rodney, I have a stock in my portfolio that just can't seem to get any respect from the investment community. That company is Gilead Sciences (GILD). Even though GILD pays a 3.5% dividend yield, sports a reasonable valuation of 18.7X earnings, has a lower than market beta at .7, has developed a drug that cured Hepatitis C, and now has proven to have an effective therapy against covid 19, the stock just can't seem to get traction. I first wrote about Gilead in a post called "Handyman Investing" on April 27, 2017.  In that blog, I complained about how Gilead had cured Hep C but the stock was not rewarded because of the loss of revenue from cured patients. Today, the stock market is in rally mode largely due to the good news that Gilead has a drug called Remdesivir that has shown to be effective against corona virus. At the time of this writing, the Dow is up about 500 points or about 2% mainly on news of the positive clinical trials. Remdesivir is not a new drug, it was developed to treat the Ebola virus but was not proven effective. Remdesivir has been used to treat coronaviris since the outbreak began in China through goverment regulated clinical trials with anecdotal positive results. When the pandemic reached the US, sick patients needed to be enrolled in FDA trials to be treated. It takes time for the trials to produce reliable results and that is why the good news has been delayed. People who contracted corona virus and live in smaller communities were not eligible to receive the drug because they were not part of the study which typically is performed in major medical centers.  I believe that people all over the world are desperate for good news after 2 months of isolation and depressing news. That is why the news from Gilead Sciences has lifted spirits and markets. It also doesn't hurt that interest rates are virtually zero or lower in real terms. Anyone looking for a return on their money MUST be in stocks. That being said I expect investors will experience additional pain this year when stock markets test their recent lows. As for Gilead, even though they are riding high on todays news, don't look for huge gains for them because sales of Remdesivir are nonexistent-they are currently giving the drug away for free. Aretha and Rodney, who both have passed are surely smiling on the company knowing that R-E-S-P-E-C-T is more valuable than anything.