- Martin Sosnoff
Post Time For Some Ragamuffins
I’ve a soft spot for junk, but I’m still a realist. Anyone can throw money at Apple and Microsoft then sleep soundly. But, buying stocks out of phase, maybe facing bankruptcy, requires much courage and hard analysis. No obvious conclusions, no databases to consult.
I remember Mike Milken’s study on Chrysler decades ago when Lee Iacocca came in to run the show. Geico was a $4 number then, too, after underpricing insurance policies. A once impeccable Lehman Brothers, overleveraged in real estate, bit the dust. I owned all 3 and scored big with Geico and Chrysler. You can’t just buy 1 or 2 pieces, but a half-dozen makes sense. Lehman Brothers bit the dust, a total loss.
A once proud Ford Motor now trades around $10 a share. General Motors is down from $67 to low thirties while General Electric stands cut in half past 12 months. Robinhood’s trajectory falls from mid-eighties to $8. ‘Hood isn’t on my recovery list because I place no store on its franchise. New York Times, cut in half past 12 months is a century old franchise embedded in our culture, but with mediocre management past 4 decades. Rupert Murdoch got rich from a standing start, and his roots were in Australia.
Look at Teva Pharmaceutical Industries, now $7, down from $25 when there was excitement over generic drugs. I’m impressed with current cash flow, and it makes Teva playable. Energy Transfer, an MLP, traded at $18 years ago, now around $9, is viable with a 6.7% yield. Just let oil futures levitate. Then, there’s American Airlines, a $50 stock years ago, now flirting with $13. Maybe, I’m betting the worst is over.
Macy’s, now a mid-teens blob, ain’t Costco, trading over $500, but they’re still savvy merchants. Macy’s is on my wait ‘n’ see list. Five years ago, American Airlines was a $50 piece of paper, now low teens. I own its converts which never broke par and carry a 6 ½% coupon.
A bunch of commodity stocks were cut in half after strong rallies from March, ‘21 bottoms: U.S. Steel, Freeport-McMoRan, Alcoa and Cleveland-Cliffs got torn apart past 3 months. Because I’m outside the economic recovery forecast next 12 months, I’ve excluded such commodity plays for now unless they drop another 25%.
I carry oil futures at $100 a barrel. So, Halliburton gets my money. Stock ticked in the forties, now high twenties, hit a 52-week low of $17. Management handled itself, aptly, cutting overhead in the economic wobble of 2021 when it bottomed at $7 and change. Its 52-week high was $44, now twenties, so a legit spec, but now above ragamuffin status.
How many of us remember oil futures traded under $20 a barrel some 20 years ago? Two years later oil ticked at $40, then peaked over $140 in 2009. Don’t ask me why. Almost 7 years ago, Microsoft traded at a 10% discount to the market. Only God knows why. Embedded precept for me is stocks can sell anywhere, too high or in the dumps. When there’s reason to pull the trigger, do it. So far, the energy sector is fruitful, specifically MLPs like Energy Transfer.
My exclusion from serious consideration covers any company I think could face bankruptcy next 12 to 24 months. Then, too, I’ll X-out any property where economic recovery is unlikely 12 months or more away. Earnings leverage needs to be fulsome. Candidates should be selling no more than 5 times your future peak earnings forecast. Being early counts big.
There’s another class of wasted stocks that covers big capitalization multinationals like Ford Motor, General Electric, General Motors, Boeing, Wynn Resorts, American Express, Deere, Tesla, Dupont De Nemours, JPMorgan Chase, even Alphabet and Meta Platforms, which trade markedly below recent highs. I have no special feel for them so I stay away. But, Boeing made me rich in the early sixties and I just took a probe.
Don’t ever think a $1,000 sweetie carries more motive force than a 5-buck dog. Not in today’s setting. The market shows no respect. Ultimate risk is embedded in financial markets, inclusive of equities, oil, junk bonds, interest rate futures and currencies. I remember Treasuries yielding 15%, not 2%.
Playing stocks with iffy capital structures along with negative fundamentals is a game requiring enormous courage and insight. But, passive investors are entitled to play if they have a real feel and knowledge base on a specific industry or stock. It could be in energy, airlines, retailing, even banks. Own a handful because at least one will tap out.
I remember (with chills) going up in the Lehman Brothers elevator for a visit with its chief financial officer. Posted on the elevator’s wall was a paper giving directions to prospective trainees on appointments. Soon after, Lehman had no elevators functional. Bankrupt. Then, leveraging your balance sheet with high-rise office buildings no longer worked out. The chief financial officer made a good case to me that they’d manage through. But, the Federal Reserve Board and U.S. Treasury withheld any largesse. Over the decades, I’ve learned to detect fear in the eyes of a bunch of lone wolf real estate operators.
Even the smartest guy in the room can jump out the door of a stuttering aircraft, wearing his backpack, not a parachute. Our market is one noisy ballroom jammed with jitterbuggers. Does anyone know the proper price-earnings ratio for Shopify? What’s next year’s earnings power for Meta Platforms, Amazon, Tesla, even Microsoft? There’s almost as much risk in such paper as there is in Halliburton, Macy’s, Teva, Energy Transfer et al.