Late Innings For Ragamuffins
When I read one analyst covering Freeport-McMoRan raised his price point from $37 to $39, I sold some shares at the market. Freeport, ticks around $36, but a year ago was a single digit piece of paper along with my other ragamuffins. Where wuz you, Charlie?
Scant commentary on under $10 paper then and none on 5-dollar numbers. When a stock sinks to 5 bucks, analysts usually hide deep in their cubby-holes fearing the unknowable. Nobody writes 40-page reports.
The market bottomed out 13 months ago when players decided bets on reflation nestled in the cards. Over twelve-months the S&P 500 streaked over 50% and NASDAQ 100 did better, plus 65%. My ragamuffins sprinted 300% to 400% irrepressibly.
I’m talking about Freeport-McMoRan, Halliburton, Macy’s, U.S. Steel, Alcoa. General Electric along with American Airlines and Ford. In each case the fundamental issue was whether this paper would face bankruptcy or massive equity dilution to stay in business. But you could project sizable earnings power in a recovering economic setting. Copper is looking at $4 a pound, not $2.50. Pricing into Freeport’s income statement with a 51 cent a share March quarter. FCX based out at 5 bucks, March of 2020. The new dream is leveraged earnings power in commodities starting with oil and going onward. General Motors has doubled off its low along with Occidental Petroleum. Suddenly, instead of analyzing 5-dollar paper, I’m revisiting $300 paper and higher. Namely, Facebook, Microsoft, Alibaba, Amazon, Alphabet and Alibaba. I’ve left aside Tesla and Netflix, but not Goldman Sachs and United Healthcare which are more analyzable.
Revisiting growth, particularly technology and the internet. Your easiest entry point is NASDAQ. The investment construct of 60/40, equity to debt, is slowly going by the boards. Anyone buying (or owning) Treasuries and AAA corporates is bound to underperform 5% high yield debentures with duration under 10 years.
Preferred stocks, mainly in the financial sector, do yield 5% but they get called away from you in a low interest rate setting. Preferreds sell at their call prices, so no appreciation likely. My high yield bonds have appreciated at least 10% with more to come barring rampant inflation. The sole stock sector where yields rise into the 7-8% level is in MLP’s. Shareholder distributions are largely tax sheltered as returns on capital. I own the best with high distributable payouts that don’t exceed cash flow. Enterprise Products Partners fits this mold.
If Biden sticks seriously on levying a capital gains tax rate running over 40%, the focus on investing is bound to change. One-decision stocks will come back into focus. Hopefully, their price-earnings ratios won’t soar into the clouds like in 1972. This investment construct then adhered to by Morgan Guaranty Trust destroyed them in the ensuing recession of 1973-’74.
I don’t see founders of Microsoft, Amazon and Facebook paying taxes on capital gains as yet running into hundreds of billions. Let them build up their foundations further and invest in education, medical science and the environment. Why not tax unrealized gains over a billion?
I already own too much Microsoft (from appreciation) but I’ve started a reorientation to great franchise stocks that sell at not much more than 20 times forward 12-month earnings. New faces embrace United Health Group, Blackrock with adds to Facebook, Alibaba, and Amazon, the inscrutable.
I’m winding down Halliburton, Freeport-McMoRan, Alcoa and U.S. Steel after
fulfilling their promise. Macy’s and General Electric remain legitimate GDP recovery plays, longer lasting than steel, copper and aluminum’s resurgence.
Morgan Guaranty’s Portfolio Largest Holdings at Yearend 1972:
This table on Morgan Guaranty Trust’s yearend 1972 top portfolio holdings goes to show you how crazy professional investors get by believing their own patter. Consider the life of a growth stock averages 5 years, some a decade but nothing is forever.
Don’t stand by and let ‘em tax you to death.
Disclosure: I am/we are long FCX.
Additional disclosure: Freeport-McMoRan, Halliburton, Macy’s, U.S. Steel, Alcoa, General Electric along with American Airlines.
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