My maiden stock pick wasn’t IBM. I plunked down a thousand bucks on Kennecott Copper’s nose, attracted by its 5% yield. This was back in 1954 when I was a $100-a-week copy editor at Fairchild Publications.
Those were the days of blue chips like U.S. Steel, General Motors, DuPont and Kennecott. IBM was like a religion of the electric typewriter. Xerox, then named Haloid, produced industrial chemicals. The 914 copier was nearly a decade away.
Wall Street operators like Jack Dreyfus then went to the moon on Polaroid, the speculator’s North Star. Jack also spent his time at the local racetracks. Ponies kept his blood flowing.
Managements then held to their stodgy persona. The Watsons at IBM prescribed white shirts for their salesforce. Took another 50 years for the t-shirt to emerge as local dress in Silicon Valley. Nobody, then, hired Jewish boys out of City College for their year-long training programs (I’ll never forget that). Goldman Sachs was the sole major brokerage house on the Street with Jewish head management.
I remember walking into JPMorgan’s headquarters office. On the ground floor was a sea of tiny, boxy desks, free of any messy papers. Just a leather appointment book set next to the telephone. My thousand bucks buy of Kennecott was then history. A decade later, my path crossed with Warren Buffett. Both of us were evaluating American Express which had dived on exposure of the Salad Oil Swindle in their storage tank farm.
The credit card business had just taken off, with AmEx its leading player. Its float on receivables was creating an enormous profit center upon reinvestment. I held AmEx for a couple of years. Buffett still hangs in, his position exceeds $20 billion. Warren’s richer than yours truly.
Today, I sit with nothing but paper losses on bundles of 2-year Treasuries, yielding over 4%. Daily, they ease 5 or more basis points, so I buy more. I dream of negative interest rates surfacing in the U.S. You’ll lose no sleep inventorying this paper, unless you’re a forced seller.
Anyone long, even 25% in stocks, suffers unless your concentration rested in oils, starting with Exxon Mobil and going down to MLP paper like Enterprise Products Partners, yielding over 7%.
Past months, I’ve watched growthies take gas. I’m talking 3% daily chops for these burnouts. The list elongates starting with Netflix, Apple and going down to Meta Platforms, Amazon, and Tesla. Even Microsoft gets taken out and beaten up along with Berkshire Hathaway, normally a polite piece of paper.
What’s going on? Maybe the market had its fill of stocks selling at 1.5 times to 2 times the market’s multiplier. The Street’s major houses still haven’t come to grips with market overvaluation. Few months ago, punditry blessed the price-earnings ratio for the market at nearly 20 times earnings. Now, we’re getting closer to a projected P/E ratio at 15. Everyone’s still holding earnings at an unrealistically high level, despite recession in the air.
This is pie-in-the-sky babble. Cyclical stocks like U.S. Steel, Alcoa and Freeport-McMoRan stand nearly cut in half. Bank stocks can’t get out of their own way because of fear for flattened net-interest margins and trouble brewing in their portfolios of below investment-grade loans. The wealth management sector has peaked. Traditional pie chart investment construct of 60% equities, 40% fixed income no longer working.
Past 12 months, the market rightly latched onto energy paper like Exxon Mobil, Occidental Petroleum and ConocoPhillips. The bet now is OPEC wins its initiative, putting energy futures back over $100 a barrel. Oils remain the cheap sector in the S&P 500, probably under 10 times earnings with rising dividend payouts and mounting free cash flow.
My baggage is heavily weighted in energy, owns no tech paper, sold out banks and is allergic to basic industrials. Much of this paper has been cut in half, inclusive of General Motors, Ford Motor, U.S. Steel and Alcoa. Now is not the time to bet on the industrial heartland. No early comeback play. Boeing is the sole industrial I inventory, hopefully, at the bottom of its cycle and learning curve.
Disbelief in growth proved enormous in scope and amplitude. Chances run high we see a repeat of the down cycle carved out in 2013 – ‘14. Why so many bargains then? First, earning surprises. No company on the list was exempt from hiccups, so there was plenty of residual disbelief. Gross margins for tech traced a downward slope, excepting Intel. Decompression in valuations among growthies early nineties matched 20 years earlier, that growth stocks would repeat themselves and end up at 2 times the S&P 500’s valuation.
This is what happened, exactly, creating the internet bubble of 1999 – 2000 and the market’s utter collapse, particularly the NASDAQ 100 Index. Whenever growthies sell at 3 times the market’s valuation, you’re on dangerous ground. Today, we’re facing comparably extreme metrics, even assuming fundamentals hold up, but not a given. During the 1973 – ‘74 recession, competitive forces collapsed earnings for Polaroid, Xerox, Avon Products and Eastman Kodak. They never came back.
But, over 40 years ago Walmart was defined as a small regional discount house that just kept growing. Even today, it’s not so pricey. Costco, likewise, stayed on its growth trajectory and sells now around $500 a share, along with UnitedHealth Group and BlackRock. Stock prices in the $500 range no longer are badges of honor. We’ve seen splits from Amazon, Meta Platforms and Tesla. Nobody really cares. I’ve found it’s easier for a $5 ragamuffin to end up at $35 than for a $500 item to zip on and on.
In a decelerating economic setting, growth stocks likely disappoint. Their price-earnings ratios, even after some correction seem projected for perfection. Microsoft, analyzable and not so pricey any longer, acts doggy month-after-month, week-after-week. Who woulda dreamed that Exxon Mobil had the muscle to triple over 12 months?