Never Love a Stock (or Bond), It Won't Love You Back

Ambivalence is the magic word for investors whether day traders or long cycle holders like Warren Buffett. The average life of a growth stock lasts no more than five years. There are a few exceptions like Microsoft and Apple. Xerox and Polaroid never came back.

Overleveraging itself nearly buried General Electric. It flamed out from over a $400 billion market capitalization to approximately $50 billion 12 months ago. Now it’s played as a low-priced comeback speculation.

I’ll assume you never rationalized yourself into the poor house, riding down stocks ticking above par into single digits. I own a bunch of paper that traded in the forties and fifties then turned into ragamuffins. My average cost ranges between $5 and $10 a share for household familiarities: General Electric, Macy’s, Haliburton, Freeport- McMoRan. I missed out on names like Alcoa and U.S. Steel which just successfully sold a tranche of equity in the high teens.

Corporate hubris never stops. Exxon Mobil is a good example. Exxon as a stock traded at $70 and ticked as low as $30 March of 2019, making a double bottom, November of 2020. It posted a loss of $20 billion past year, is cash flow negative and maybe has an earnings rate of $2 a share this year with the stock ticking near $50 a share.

As a stock, Exxon Mobil peaked over $90 a share 5 years ago. Even after its recent late foot, the stock is a disaster. Same 5-year period, Microsoft and Amazon have gone around the clock nearly 400% while the S&P 500 Index doubled.

Exxon yields nearly 7%, management stubbornly keeping it there, but where’s the rationale? Capital expenditures need to be cut and their oil reserve asset base got a writedown, finally. If ever there was a custodial management, Exxon Mobil is it, in spades.

Soooo…. thirsting after yield can be a killer with 10-Year Treasuries barely yielding over 1%, but on the rise and AAA corporates at 2%. Passive investors holding this paper could face writedowns of 10% as the yield curve turns more positive. My call. A sense of financial market history reveals median yields ranging between 5% and 7%...for decades. Nobody, today, ventures out with an aggressive call on coming inflation and escalating interest rates.

But, interest sensitive sectors, banks and brokerage house paper, earlier selling below book value, like Goldman Sachs and Citigroup, since March show buoyancy. Freeport-McMoran, a play on copper bottomed at five bucks under a year ago, but now ticks on huge volume over $30. Who knew? I saw just a possible double into the low teens. Same for Halliburton.

There’s still plenty of disbelief in low priced paper like General Electric, Macy’s and American Airlines. I’ve not turned my back on Alibaba which trades over $260 but faces the ire of its Chinese regulators.

What I’m saying is conservative investors face as much peril in bond and equity markets as I do owning ragamuffins, growth stocks in disrepute and junk bonds. Alibaba was able to tap the bond market for billions at a small premium over the 10-Year Treasury yield. As yet, I’ll reject any corporate bond yielding under 5%.

When I checked out the long term chart on Freeport- McMoRan, I was surprised to find that it traded over 60 on the eve of the financial meltdown, 2008-’09. Then it traded below 10 bucks in 2009 but snapped back to $60 in 2010 in an economic recovery setting. How’s that for a jumping jack?

With a wholesale dose of optimism building, the chart says we could see FCX chugging back into the forties. On any whiff of renewed deflation (not my call) this babe fades back into mid-teens. FCX some days shows a price range of 10%. So far, every time I sell covered calls, I end up losing a couple of points. I’ve learned to hate this stock.

Now is the time to go against the grain.