Vanity Embraces High-Priced Stocks
Olden days, management split their high-priced stock, pushing it back down into fifties. Such a gesture was considered enticing for new shareholder interest, but no longer.
Warren Buffett years ago railed against stock splits because they added no value. But even Warren divided Berkshire into 2 stock classes, one trading at $2,000 or so and the other in the $250 range. Some tech houses today trade between $2,000 and $3,000. I’m talking about Amazon and Alphabet. Plenty of $500 to $1,000 jobs like Tesla, Netflix, Shopify and Blackrock jitterbug across my Bloomberg screen.
I wanted to give each of our grandchildren a round lot of Amazon, but we’re talking $3,200 a share. A hundred shares is enough for college, maybe twice over. In 2015, Amazon sold around $500, then a manageable sum, but still serious money. Jeff Bezos worth over $100 billion is giving Bill Gates a serious run for the roses. Actually, my experience suggests it’s much harder for a $5 ragamuffin to double or triple than for Microsoft, Amazon and Alphabet to attain the moon. Stocks trading at 5 bucks or even a $10 number do sell down for good reasons. Operationally, they can be spurting blood like airlines did, or they’re over-leveraged and unable to improve their financial condition. Skimpy cash flow for new initiatives. No investment banker wants them as a client ripe for an underwriting.
Consider, a year ago you could have bought a handful of forlorn ragamuffins trading around 5 bucks a share. The list embraced retailers, energy MLP’s and vicious cyclicals like Freeport-McMoRan Copper and Halliburton. Throw in U.S. Steel and Alcoa. Macy’s was a throwaway as was GE and American Airlines. You could smell blood gushing from American Airlines vacant seats. With some hesitation I bought a block of American Airlines 6 ½ convertible debentures amid a difficult underwriting setting.
All such throwaways a year later show doubles, triples and quadruples like Freeport McMoRan and US Steel. By comparison, the S&P 500 rose 50% and NASDAQ 100 a little more. Yes, it seemed you took ultimate financial risk. If you did your homework, all of these dogs carried enough balance sheet wherewithal to stay alive a year longer. Some, like Freeport and General Electric, longer, maybe 2 years before possible death and destruction. U.S. Steel recently raised equity at $16 a share, the stock currently ticking at $25 now.
Past 12 months Freeport McMoRan galloped from $5 to a $33 price point. Count on your fingers, that’s over 500%. Try 400% for US Steel, GE touched down in low single digits, but decades ago was number one in the S&P 500 list with a market cap of $450 billion. Proud Macy’s was a $5 number with American Airlines a respectable $10 piece of paper, now $24. All carried in the wave of the reflating economic setting. That’s all you needed to believe in. Nothing more. Alcoa zipped from $7 to $33. Do you remember Ford at 4 bucks, now over $12?
Ford has lasted in business over a century. Halliburton zipped up from $5, too. Now trading low to mid-twenties.
The ready conclusion is stocks can and do sell anywhere. Occidental Petroleum’s all time high surged over $80, basing out at $10 just 6 months ago. The chart on Citigroup looks like an expert’s ski trail, down from over $80 yearend 2019, basing out mid-thirties a year ago and presently back over $70. One helluva schuss. Amazon was a $500 stock 5 years ago, now ticking over $3,100.
My bloodless conclusion is rules and platitudes on stock picking are made to be broken and discarded. They’re useless. Each cycle carries its own embedded craziness within growth and value sectors. Technology blows hot and cold. Cyclical paper is probably least understood of all market sectors. Once a stock drops down below $10 or even $20, analysts crawl back into their holes and clam up. You’re on your own. Anyone can buy and hold Microsoft, a battleship plowing the waves, exuding power and stability. Conversely, the art of buying paper under 10 bucks starts with the balance sheet. You consider how long the laggard in question can stay in business. Then figure out how leveraged is earnings power to an economic revival. You need to own half a dozen because 1 or 2 can tap out. When I’m buying a stock, say Freeport- McMoRan a year ago, under 5 times normalized earnings, I’m all in.
A good $5 piece of paper can outshine Amazon, Facebook and Alphabet…at least for a year or two. Own both worlds? Pair Amazon and Microsoft with Macy’s and General Electric. Martin Sosnoff and his managed accounts own: Freeport-McMoRan, Halliburton, Alcoa, Microsoft, Amazon, Facebook, Macy’s, General Electric, U.S. Steel, Citigroup, American Airlines Convertible
Disclosure: I am/we are long MSFT.
Additional disclosure: Martin Sosnoff and his managed accounts own: Freeport-McMoRan, Halliburton, Alcoa, Microsoft, Amazon, Facebook, Macy’s, General Electric, U.S. Steel, Citigroup, American Airlines Convertible