$500 Pieces Of Paper? Just A Few Standing

Laurels for reaching the $500 mark go to consistent growers in prosaic businesses. UnitedHealth Group and Costco, for example. Five years ago, Costco ticked at par, UnitedHealth Group at double par. Berkshire Hathaway doubled from its market low of March, 2020 but nowhere near the $500 price point of distinction.

Let’s compare steady growers with high metabolic overachievers like Meta Platforms, Alphabet, Amazon and Tesla which faded badly past 12 months. Over 5 years, Alphabet delivered a double as did Amazon. Facebook, now Meta Platforms, faded badly, delivering a fat zero. Tesla, past couple of years, zipped from $50 to $300, but is now a hundred points off its high.

The chart on Microsoft resembles Costco’s, from under par to $350 a year ago before giving up 100 points. Still, a premium performer over 5 years. Finally, I get to Apple, our biggest market cap growthie at its high, a $2.8 trillion piece of paper 6 months ago, now $2.2 trillion. Even best of the best won’t escape a 20% correction in a soft market setting. Five years ago, Apple was a $40 stock.

If you’ve got perfect pitch and hop on early in a growth stock’s trajectory, you’ll make 300% on your capital over 5 years. In the early sixties, a growth stock analyst, I promised my investors they’d compound at 2%, monthly. For many years, Polaroid and Xerox delivered more than Apple. Then, they flamed out, losing technological primacy over competition, and dwindled into single digits, as dust gatherers.

How did cyclicals fare past 5 years? When I checked out U.S. Steel’s chart, I wasn’t surprised. Big steel topped out March 2018 at $47 and traded under $10 three years ago, a ragamuffin. Got as low as $4.54, March of 2020.

Consider, General Motors needed to be bailed out a couple of times with U.S. Treasury infusions of multibillions. Citigroup needed a reverse split to put it back into the high teens. Lehman Brothers was denied bailout funds and Merrill Lynch was forcefully merged into Bank of America for peanuts.

Observations: Past 6 months, Alcoa faded from $98 to $42. If your entry point on a cyclical is wrong, you can lose most of your capital. Growthies get cut in half as well, but at least many retain come-back potential. Growth sells at too big a premium to the market at present, which seems to me still as much as 20% overvalued. Net, net, in a sloppy market setting, you’ll lose more in cyclicals than in growthies.

Facebook, now Meta Platforms, is a prime case of what a souring position can cost you over a couple of years. Five-year performance is zilch, down from its high past year of $384, now approaching its 5-year low of $123. For years, I’ve torn apart their financials, quarter-by-quarter. Putting myself in Zuck’s shoes, I wouldn’t have done anything conceptually at odds. In good times, you reinvest all your operating cashflow in the business: New hires, rising R&D allocations and acquisitions that complement your business structure. Expenses go higher and higher with earnings. You forge ahead aggressively to renew your business and leave competition in the dust.

Nobody’s perfect. I remember Edwin Land, head of Polaroid, invested heavily in x-ray technology while Xerox threw money at computer readout competencies to no avail. Later on, Xerox even bought a brokerage house with excess capital. All mistakes.

JAN ASSELIJN, THE THREATENED SWAN, 1650

I’ve always preferred operators who are monolithic, that do one thing better than everyone else: Boeing in jet aircraft development, Exxon Mobil in drilling and exploration, an efficient oil field operator. Walmart and Costco remain retailing powerhouses. Will anyone ever best Tesla in electric cars? Still too rich for my money.

I’ll look at cyclicals when they’re in single digits and I can prove to myself they’ve the wherewithal to stay in business, like Halliburton, U.S. Steel and Freeport-McMoRan. In the batter’s box, you wait for your pitch. Past 5 years, even AT&T got cut in half. No longer a widow’s stock but trader’s meat.

The only piece of paper hovering at $500 that I tracked on my Bloomberg screen, is BlackRock, BLK, which is down from its high of $973, a market proxy. Costco hangs in, at $505 along with UnitedHealth Group. Don’t ask about Netflix, Meta, Tesla, even Deere and Home Depot which have faded far below highs set over $400 a share. Berkshire Hathaway doubled to over $300 before its correction to $275.

A $500 stock is no longer a badge of honor, perhaps the summit of a sharply descending expert’s ski trail. Meanwhile, Exxon Mobil which traded at $60 just a year ago, now is in the nineties. Occidental Petroleum has tripled over 12 months, up from $25 a share, still bests the market on down days.

Can you learn much in an antsy market setting? Well, growth stocks won’t protect you from a forced haircut of 20% or more, no matter how racy the story. Value paper eases at least 20%, too, but nowhere near the fall-away in story stocks like ARK Innovation and Shopify selling in the clouds on valuation. Gunslinger paper.

The critical question to ask yourself is what kind of player do you want to be, growth or value? High volatility vs. low volatility? Day trader or long-term holder? If you switch from 1 M.O. to another with any frequency, you’re bound to tap out. Traders wear shiny pants and sport yellowed collars.

Watch how the smartest guy in the room invests his gelt, namely, Warren Buffett. Warren’s portfolio structure would rate an F in any MBA class, particularly for overconcentration in single industries and single stocks. At least, Warren does his homework on what he owns. Double-weighted in financials and top-heavy holdings in Apple and now Occidental Petroleum where I hold a 5% position.

Five stocks comprise 69% of Berkshire’s portfolio. Apple is at $125 million, nearly 40% of assets. All Buffett’s holdings can manage through diversity and fully participate in their industry’s good times. Pivotable operating variables are easily understood as is dividend paying capacity. Everything fits into a Ziploc bag.

If I’m right, that the country faces a good-sized recession, Buffett’s bank stocks will underperform for a year or longer as trading, underwriting and wealth management slough-off. How many investors can summon the courage to do what Buffett does?

Count ‘em on 1 hand, maybe 2.