My read on 13f quarterly portfolio reports showed more losers than winners. High portfolio turnover was the giveaway sign of trouble. Nobody went to the moon on high tech plays like Meta Platforms, Amazon and Alphabet. Microsoft faded while Apple hung in.
Fondly, I remember the early sixties, then a young analyst searching for great plays. Polaroid and Xerox were my meat. I figured out that Walmart held primary on the board with its everyday low prices. Sears, Roebuck was giving up share of market.
Consider, past decade, Berkshire Hathaway has advanced from under par to over $300. This counts up to a compound growth rate of 11.7%. Nice, but not exactly a barn burner. Even Buffett missed the initial internet surge years ago. Later,he compensated with his monster play in Apple. BRK hung around $50 a share for a long time. Meantime, Microsoft lifted off $50 a share to $350 before easing down to $250. That nothing is forever remains a sound working hypothesis
Although Microsoft can disappoint for a year or longer, compare its long-term trajectory with a well- placed industrial like Exxon Mobil. Exxon peaked near par some 15 years ago, now ticking at $113 with a dividend yield of 3%. Exxon’s maximum leader, Darren Woods sports an annual take away around $25 million. Serious money.
Disbelief in Growth Surfaced in 2013-14
Estimated Premium or
Discount to Stock Market
Company_____________________________Valuation, May 20______
Google 10%
Apple -10%
Merck zero
Eli Lilly zero
Bristol-Myers Squibb zero
PepsiCo +15%
Hewlett-Packard -35%
Proctor & Gamble zero
Coca-Cola 10%
InteI -10%
Microsoft -10%
McDonald's zero
Cisco -20%
Oracle -15%
Why so many bargains then? First, earnings surprises, no company in this list was exempt from hiccups, so there was sizable residual disbelief. Gross margins for tech houses then traced a downward slope, with the exception of Intel. The decompression in valuation for growth in the early nineties and was the thematic strand outstanding. This lasted until the internet bubble of 1999-2000, a very foolish interlude of rank overspeculation.
The maxim about holding some stocks forever ain’t airtight. Polaroid, Xerox, even Sears Roebuck buried its shareholders. They topped out in the 60s and never came back. Morgan Guaranty’s list of 25 “ hold forever” stocks, counted down when the market peaked back in 1972. The wolf sat at the door for Kodak, Polaroid, Xerox, and Sears. They got crushed.
Morgan Guaranty's Portfolio
Largest Holdings at Yearend 1972
Company Price-Earnings Ratio Premium over Market Index
IBM 37.4 100% Eastman Kodak 48.2 165%
Avon Products 65.1 253%
Sears, Roebuck 29.5 60%
Xerox 48.9 166%
Procter & Gamble 32.0 73%
Walt Disney 81.5 343%
Polaroid 90.7 393%
Schlumberger 57.2 211%
Coincidentally, the market in 1972 traded at 18.4 times earnings. Not much different than where we stand today. Premiums then for growth stocks not much different from today’s evaluation of three times the S&P 500 index. The Internet fiasco of 1999 -20 collapsed the entire market and precipitated recession in 2000.
Having said all this, we expect to find our way back into some growth stocks where valuation isn’t extreme. Apple is our new “buy”.
What’s so eerie about the recurrent overplay in growth stocks is absence of any restraint on price earnings ratios. What was Disney doing at 81 times earnings and Polaroid at 90 times? I remember Polaroid's headman, Edwin Land, would hold his annual meetings, outdoors in Boston. Populated by little old ladies, who held onto their odd lots forever. Later on, PRD got destroyed by 8mm cameras from Cannon and Nikon. Nothing is forever.
Some 50 years later, stocks like Facebook, Amazon, and Alphabet flew off the page, but couldn’t sustain their heady growth. Penalty for being wrongfooted on a growthie can cost you 50% over a short time. A faulty entry point in a cyclical like Alcoa, or US Steel likewise costs you just as much, before you wake up.
I admire the elegance of Mike Milken's MAD ratio. It’s the market value of a corporation's debt to the market value of its equity. You need to see close to a
one-to-one ratio. This indicates capacity of a corporation to refinance and stay in business.
Bottom of cycle, stocks, like US Steel, Halliburton, Freeport McMoran, traded in single digits, then recovered into the 30s and 40s. Alcoa peaked at $90, a play with plenty of liquidity both ways. In the 2008 -09 financial meltdown, Bank of America’s $25 preferred stock collapsed to five bucks. Milken financed them, with billions, and saw this paper snap back to $25.
What’s my inventory in growth stocks currently? Alibaba and Taiwan Semiconductor, which sell now at reasonable price earnings ratios, certainly under 20 times next, 12 months out. Cyclicals remain the biggest gift in the market just so long as the economy doesn’t slip into recession. My biggest call here is airline paper. Namely, American Airlines, Delta and United Airlines. On the concept that Boeing‘s at the bottom of its aircraft learning curve I’m a player.
So far, airline traffic remains surprisingly strong, not anyone's expectation.
The FRB has begun to signal that future quarterly bumps in the discount rate could taper down. Like it or not, this is the critical variation in the short term progression of the stock market. I remain agnostic.
Net, net, financial markets seem playable, but dangerous. Keeps me under 50% long in stocks. I’ve been humbled in Treasuries, holding two-year paper with sizable shrinkage. My biggest insight is what seems conservative to do can cost you big time. Think of all the capital tied up in pie chart absolutism, namely, the 60/40 ratio for equities and fixed income paper. Ungreedy families, who never willingly overspeculate are down nearly 20% year to date.
Trillions upon trillions in portfolios are managed by banks, like J.P. Morgan and brokerage houses like Goldman Sachs. Polite investors stand battered by their advisers’ portfolio constructs. Over a five-year period, few houses outperformed their benchmarks.
My jewish grandma was on the money when she said, “Nobody promised you a rose garden, sonny boy.”