Broken Down Growthies, Junk Get My Gelt

I own my share of Microsoft and Amazon. They're luxuries but, then I draw the line. None of these such growthies selling at 60, 70 times earnings shows value added on their heady stats.  

I remember Kent Damon at Xerox scolding analyst groups for not doing their homework. Cycle-to-cycle the course of growth stock valuation gets shabby treatment. 

Extremities of overevaluations are best captured in this 1972  table of prime growth stocks. P/E’s range up to 90 for Polaroid and 48 for Xerox.  IBM and Procter & Gamble traded in the thirties.  At this time 30-year Treasuries traded around 6%, far above today’s 4% level. 

Forget about the concept of a Nifty Fifty stock group to feed off. The Morgan was destroyed in their heady optimism and reverted back to a more conservative valuation for client stock portfolios. 

What about concentrating on a half-dozen stocks? Well, there are already holes in the Magnificent 7 at present. Do you really want to own a handful of stocks where it's difficult to build an earnings model?

I can build an earnings model on bank stocks based on my economic outlook for internal hard asset value in real estate holdings write-offs in commercial real estate office space. 

 I do own Citigroup and Bank of America. My experience with BAC goes back to the bank meltdown almost 15 years ago.BAC’s $25 preferred stock collapsed to 5 bucks. Twenty years ago JP Morgan turned down my mortgage application. I was a too one-of-a-kind buyer in the Hudson Valley. But, my mortgage paid off. The Hudson Valley thrives. Lest we forget, there are more banks than bankers in the world.  

The way to deal with all such bank stupidity is through diversification. I’ve 10% of my assets in Citigroup and 

Bank of America. But, I watch my holdings in Lehman Brothers turn to dirt. Mighty Lehman Bought high rise real estate at the top of the market and succumbed. They didn’t know what hit them. 

I’ve a soft spot for junk, both bonds and industrials. Two of my great investments, Polaroid and Xerox proved totally ineffective in diversification away from their basic business when challenged successfully by 8mm photography on FAX machines and then wireless. 

Later, I got lucky with Nextel,  a 5 dollar piece of paper. Our son, Scott, went to work for Nextel on the eve of entry into wireless telephoning just getting off the ground. The Street was too slow, in seeing wireless as a major new sector in communications. Street analysts put just a 10% saturation rate in wireless. Today we’re pushing over 100%. 

You gotta be early as the discount junction waits for nobody. Disbelief, too, waits for nobody. Look what happened to this bunch of growth stocks when growth petered out.

Management stocks dropped 10 to 20% in valuation, overpricing, not on fundamentals. For me Hallibuton was the perfect 5 dollar play. It was an oil service leading in drilling and exploration. 

In 2020 the energy sector turned south and HAL plummeted from $25 to $5 and then reserved itself and rapidly recovered from mid 2020 on. The market clearly had overreacted to the industry’s cyclical contraction. But, HAL was still intact and ready for industry turnaround. 

HAL should have been analyzed as a major player with a pattern of energy earnings over a good year, bad year, average year. Such earnings at least $2 a share so the stock already was a 20 dollar piece of paper, not a bankruptcy. Even in a depressed industry, HAL had sufficient liquidity to stay afloat. 

So from $5 to the mid thirties, its recovery was in the 500 to 600 range. Such action rests unsung. HAL’s recovery far exceeded the Magnificent 7 and its ilks. 

It trades now in the low thirties. 

So investing in 5 dollar numbers just becomes a balance sheet issue of staying in business, then purporting earnings power. 

Lehman Brothers failed me but recovery in the banking and finance sector is sizable so far in the twenties. I’m not projecting a recession so I own Citigroup and Bank of America, both with a checkered earnings history.