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,

Buy the Bank

 Last year I sold some stock holdings and invested the proceeds in a basket of laddered CDs. The rate I got wasn't great but it was a lot better than it is now. Some of these instruments have matured and some brokerage CDs were called. Now it looks like any new purchases of CDs would result in a negative real rate of return. I say this because the rate paid by banks is much lower than the inflation rate, which results in a net loss. To make matters worse, the puny yield on the CD is taxable. So what is an investor to do? When looking at the issuers of the CDs, I can't help but notice that the stocks of these large money center banks are paying a dividend yield of 3-6%. They are also trading at an attractive multiple (PE ratio) that is lower than the overall market. The XLF which is an Exchange Traded Fund that tracks the Financial Industry has lost over 20% of its value so far this year while the S&P index has gained about 10% so far this year. A decent dividend yield and a beaten down stock price is just the kind of thing that interests me. Throughout this troubled year of pandemic, job losses, business shut downs, wildfires, hurricanes, political turmoil and 250,000 deaths, most banks managed to stay profitable. The stimulus package earlier this year helped because it allowed the unemployed make payments on their loans. Another stimulus package will also benefit banks and people who owe money to them. Banks also benefited from the PPP program because they made money on each loan application. I haven't forgotten that we are in a recession and the banks will most likely have record charge-offs on loans in the future, however, most banks are beefing up their allowance for loan losses in real time. There are many risks banks will face in the future but they are in the business of risk taking and will deal with anything that develops. The banking system is the backbone of our economy and I am confident that our government will not let it fail. In summary, if you don't like the rates banks are offering to depositors, buy the stock instead. Over time the dividend and the stock appreciation may produce out-sized returns.

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.