If Earnings Disappoint Grab A Phone, Yell “Sell”
Will Rogers got it right when he said “If you buy a stock and it goes down, you never should’ve bought it.” Valuation structure can take years to reset. Sixty years ago, the market sold at 20 times earnings where we stand today. Inflation snaked along at 4%, then, a dead issue.
Such complacency ended when Lyndon Johnson escalated spending to fund the Vietnam war effort. We dropped megatons of bombs to no effect. It took years for investors to wise up. A long lasting inflation was at hand.
As Alan Greenspan once said “You make your way by probability.” Sort of what our present FRB persues. Nobody dares project when inflation in wages and cost-of-living finally calms down. Think of the roller coaster ride in oil futures. You see em at par and then months later at 70 bucks, even $60.
What is the right clearing price for Tesla, for Meta Platforms? Somebody tell me why bank stocks should sell near the market's earnings multiplier considering the flop they took in the mortgage fiasco of 2008–09. Where’s Merrill Lynch, Bear Stearns? Nowhere. Citigroup needed a reverse split 1 for 10 to re-attain a respectable price level. Does anybody but me remember when Polaroid and Xerox walked on water? Polaroid is long gone and Xerox is a low grade conglomerate.
Back in 2014, everyone believed oil would hang in above 100 bucks. Today, despite record earnings, Exxon Mobil is a controversial piece of paper selling at what looks to me like 10 times free cash flow. Management chooses to buy back stock rather than pay shareholders more in dividends. This favors management not shareholders.
Exxon’s niggardly dividend policy prevails although it sells at 10 times free cash flow. I own this paper as a value play, but not carried away. Past 12 months, oil futures peaked over $100, but tick now closer to its low of $70.86.
With the S&P 500 Index ticking near 4,000, the bigger issue is how overpriced is the market if we head into recession. The silence is deafening from pundits on the Street. Nobody dares deal with such probability of a spicy drop in earnings power that could unfold. Chances are even money.
This chart on what happened to technology stocks during the recessions of 2001–2002 and 20008–09 can apply to future downdrafts. In good times, tech forges ahead to two times the market but in bad times sells at no premium. Tech currently is around two times market valuation. There’s plenty of amplitude for correction. If market risk today is at least 10%, premium paper is 20% vulnerable. This is a heavy cross to shoulder.
What’s already happened to hyper speculative stocks is instructive . Many trading near their lows on big downside gaps. I’m thinking of Macy’s, Dish, American Airlines. I’m long American Airlines but it’s a luxury in a hyper market setting. Penalties for downside surprises starting with Tesla have widened.
Only sector of the market that acts relatively unruffled is nondurable’s growth. I’m thinking of Coca-Cola, Procter & Gamble, which trade mid-range, 12-month price trajectories. PG as a stock, past couple of years, has churned, gone nowhere. I’ve never owned stodgy stocks that are storyless. But I like management dynamics at Walmart, Costco and McDonald’s.
Lest we forget, Boeing dove down 5%, overnight, but virtually doubled latest 12 months. Read my blog of 6 February. You get either the lady or the tiger. I just added to my position.
If you weren’t around the day they red-dogged Motorola,lemme tell you its story. First, know that Motorola was a successful semiconductor house from early sixties on. I remember their semi manager telling me the new plant in Arizona would pay for itself in 3 years. Later on, MOT developed state of the art portable handsets. But cellular phone profits couldn’t overcome the cyclical influence of its semiconductor business.