- With indices at all time highs, value investors like yours truly are struggling to find anything cheap enough to buy.
- Even slow growing companies are trading at elevated valuations, along with most of the rest of the market.
- Fast growers are trading at even higher, often absurd, valuations that count on years of sustained high growth rates.
- Finding growth at a reasonable price remains elusive, unless you're willing to overlook hopefully temporary concerns that are weighing down the rare stock that has pulled back to attractive levels.
I have a confession to make: I can't find a single really attractive investment right now. This is not exactly conducive to someone trying to ply their trade as a part-time investment writer, and would certainly be the kiss of death if I were already the full-time money manager I hope to become some day. So why admit it and not just continue pumping out buy recommendations on whatever reasonably valued stock happens to catch my fancy that particular day, or perhaps write some hackneyed article on the hot stock du jour. GoPro (NASDAQ:GPRO), anyone?
Well, it's because I view this website as an opportunity not just to share my temporarily dry font of knowledge, but more importantly as an opportunity to learn from fellow investors who might share my current plight. I hope this article generates some good discussion and we can have an intelligent discourse on what to do as a value investor when there is a dearth of value stocks available.
So therefore, in the spirit of the great ancient orator Socrates, I will open the debate with an absolute truth: Apple (NASDAQ:AAPL) is dirt cheap. Is this true, false, or just thinly veiled click-bait? As a shareholder of Apple, certainly I believe it is still attractive enough to continue holding. Of course, I thought it was much cheaper when I recommended it around $520 (about $74 split adjusted) and bought it at $450 ($64), when it was trading at a lowly cash adjusted P/E of 8.
Now that the P/E ratio is almost double this and their cash pile is offset by some debt, which albeit was used to aggressively buy back shares at more attractive valuations, I have to admit I'm getting a bit nervous. My main qualms come not from the plethora of tired market share arguments put forth by stubborn Apple bear Michael Blair, but rather from the building assumption of seemingly almost everyone that the iPhone 6 will be a runaway success.
Consensus usually has a way of exposing the myth of the wisdom of crowds, but just because everyone believes something doesn't necessarily mean they're wrong. It doesn't always make sense to be a contrarian for its own sake, as Mr. Blair is finding out the hard way. I'm sorry to further pile on him, but I think the discussion this generates illustrates the strength of this site to bring together dissenting viewpoints, which can then be weighed on their merits. I respect his writing and opinion on some other stocks, such as the phenomenally unprofitable revenue growth machine salesforce.com (NYSE:CRM).
So would I ever join him in shorting stocks just because they appear overvalued? Well, that's been a recipe for getting your face ripped off in this levitating market, as I could sympathize via my misstep with Amazon.com (NASDAQ:AMZN). It's certainly tempting to take short positions in high flyers like Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX), and Chipotle Mexican Grill (NYSE:CMG) that are counting on some pretty aggressive earnings growth to justify their heady valuations.
Not to mention other names which don't even have earnings to extrapolate out forever, such as Workday (NYSE:WDAY), FireEye (NASDAQ:FEYE), and YELP (NYSE:YELP), the latter two of which I would actually like at even slightly more reasonable valuations. Even everyone's favorite punching bag, Twitter (NYSE:TWTR), has been hitting back lately, rising 40% off the lows after getting knocked to the canvas.
So with stocks too high to buy and paradoxically also too high to short, since they can always go higher when unconstrained by traditional valuation metrics and supported by an accommodating Federal Reserve, what is the poor (at least compared to momentum investors) value investor to do?
Well, we should probably start by going back to basics, which is buying stocks for less than they're worth. Of course, this is easier said than done, because intrinsic value is subjective even when using sound valuation techniques like a discounted cash flow analysis, since the discount rate has been skewed lower by the Fed's ZIRP and the ECB's NIRP. When Spanish bonds are yielding less the ostensible risk-free rate, you know you're dealing with an unusual economic environment that is tough to figure out with any degree of confidence.
Therefore, we might consider investing in recession resistant stocks with consistent earnings that are easier to predict, like Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG), and my personal favorite Costco (NASDAQ:COST). However, even these high quality but stodgy growers are trading at P/E ratios near or above 20. While I think they are better characterized as decades long stories that can't be quantified by PEG ratios based on mere 5 year earnings growth projections, they are by no means screaming bargains that you could confidently buy with an adequate margin of safety.
So is there anything that is high quality enough to justify owning yet cheap enough to actually buy? You could make a case for eBay (NASDAQ:EBAY), as this article eloquently does, on the strength of their PayPal platform sustaining its leading position in the burgeoning mobile payments market. This should allow them to continue growing earnings at double digit rates even though their P/E ratio is less than 20. This seems like a decent bargain, but there are valid concerns of increased competition in both this and their legacy businesses with Amazon and Alibaba (Pending:BABA) joining the fray.
Maybe we should avoid the hard to predict world of tech and focus on something less ephemeral. It's hard to think of anything that will be more definitively in demand for a long while than oil, unless the Tesla/SolarCity (NASDAQ:SCTY) Muskopoly frees the world from these heavy (crude) bonds, so maybe a major integrated oil company?
ExxonMobil (NYSE:XOM), currently jockeying with Apple for top position as the world's most valuable company, is certainly a popular choice, with a 15% gain off the lows seen in February, but it now trades at a fairly high (for it) P/E ratio of 14. Purer play ConocoPhillips (NYSE:COP) was briefly cheaper earlier this year, but it has leapfrogged Exxon with its own 35% gain over the same time period and now trades at a P/E ratio of 15.
These may seem like reasonable valuations, but barring continued turmoil from Iraq and/or Russia, oil prices are unlikely to remain significantly above $100 a barrel for long. Many analysts are predicting a decline, coupled with an increase in CapEx spending as it gets tougher to replenish their reserves, as evidenced in their forecasts of declining earnings for both companies in 2015, and this is definitely not a desirable trait to have in this growth obsessed market.
As oil gets harder to find and extract, perhaps we could tap into that growth sector by investing in oil services companies. My personal favorites are deepwater driller Atwood Oceanics (NYSE:ATW) and Geospace Technologies (NASDAQ:GEOS), which makes the seismic equipment used to locate and monitor oil reserves. Both have pulled back dramatically on concerns that they may not be able to replicate the lucrative contracts they've won in the past, and are now trading at tantalizing P/E ratios under 10, although there is the caveat that earnings could potentially decrease in the next few years due to oversaturation in their respective markets.
There you have it, I've presented most of my best ideas, and there's not really one that I feel passionate enough about to pound the table and tell you to buy right now. I hope you recognize this not as insincere waffling, but rather as honesty in admitting that we could probably all use some help in trying to figure out this new market paradigm, to use a buzzword that often precedes bubbles and crashes, which hopefully we can avoid.
So what to do when it seems like there's nothing to do? Well, you could follow Warren Buffett's Zen-like advice and "do nothing". Or perhaps follow the hedge fund titans and traders out of stocks and to the Hamptons. Either way, I hope yAou'll join me in debating the state of the market today, and then take a well deserved break from this taxing exercise to celebrate the Independence Day of our great nation, to celebrate more important things that truly have enduring value.