Growthies Vs. Cyclicals Nothing Is Forever

The ideal growth stock sells closer to 20 times earnings. You shouldn’t think of buying a Magnificent 7 stock unless you believe its entry point hasn’t already discounted the moon. 

Buffett did this with Apple but think of all the players who lost serious money on stocks like Intel. Who couldn’t keep up with technological change in semiconductors. Disappointments like Intel end up at 10 times earnings like Ford. 

Currently, my power play is in building materials. Namely Lowes and Home Depot. It’s nice to have the FRB as a friend at your back rather than a bunch of rabid dogs fighting inflation by driving up interest rates beyond reason. We saw this with Paul Volcker driving up interest rates to 15% in 1980 and creating a huge recession. 

Now I believe the middle class will find the capital it needs to buy or upgrade in housing. Additionally, lower cost money for home improvements and appliances becomes cheaper and easier to find. If I’m right about easier money forthcoming the banking sector will do well in 3 of its major profit centers. Namely, capital for deals will become readily available. 

Major profit centers like money management and home mortgage writing can show late foot. In short, all major profit centers work in tandem. JP Morgan is too rich for me,  but Bank of America and Citigroup get my money.  

The Market has a long memory for banking disasters. Like the 2009-’10 meltdown where banks outbid each other for home mortgages with flimsy backing. Today, banks selling at mid-teens P/E ratios are playable. 

I put 15% of assets in banks and another 10% block of capital in Lowe’s and Home Depot. 

In a period of easing interest rates you want to own high dividend payers like the MLP’s who payout nearly all their free cash flow. I’m talking about properties like Enterprise Product Partners with a 7% yield. 

Think of it, installed pipelines do last 50 to 100 years. The recent announcement by the Saudi’s on increasing crude oil output is more a negative for fellow producers like Exxon Mobil. The market assumes oversupply coming.

But think of the whole story in yield spreads. You’d have to go out to 10-year maturities in the high yield corporate bond sector rated no higher than BB. The comparison with Treasuries is sizable. Ten year Treasuries sell at a yield of 3.8%.

Strangely, consider the stupidity of holding 10-year Treasuries.  Recent as a year ago, this paper sold at a yield discount to 2-year Treasuries. What were such investors thinking about? Obviously, they thought a deep recession was around the corner and that the yield on long term Treasuries would yield more over a cycle of recession. The reverse took place. The 10-year Treasuries now yield more than 2-year paper. 

In the good ‘ole days, early sixties, the Chicago player’s took Fairchild Camera up to 50 times earnings. You had to own it for a great semiconductor play. It worked for a couple of years then stopped working with an ouch.