On Seeking Alpha, it is very common to read articles from authors telling you to purchase or abstain from purchasing a certain investment. Heck, that constitutes the bulk of my work at the site. However, a downside with this approach is that recommendations tend to linger indefinitely in the abyss without any follow-up alerting the investor community that the recommendation period has closed. Today, I would like to provide updates to notify readers of my articles that the recommendation period has closed.
My short thesis was this:
"Based on historical metrics, General Mills deserves to trade somewhere in the $45-$50 per share range. The current valuation demands significant P/E contraction over the long haul. Meanwhile, the cereal industry has delivered no revenue improvements in the past four years, and firms like General Mills have hiked the dividend payout ratio and taken on substantial debt to maintain the illusion that all is well. General Mills won't be worth over $70 per share until the 2020s, and there is money to be made shorting it until then."
Since that time, General Mills stock is down 12% while the S&P 500 is up almost 7%. At this point, I would like to close my recommendation and urge short-sellers in General Mills to close out their short position. It is not that I now feel General Mills is fairly valued, but rather, that the degree of overvaluation is no longer extreme enough to justify a continued short position in a business with stable and moderately growing cash flows.
Secondly, I wrote on article on Monday June 27th titled "Charles Schwab (NYSE:SCHW) Swept Up In Brexit Chaos" in which I argued that the company's fall towards the 20x earnings range in the aftermath of Brexit offered a great entry point for a business with a record of 20% annual returns dating back to 1989.
On that date, I argued:
"For me, my favorite investments to contemplate are those businesses with established histories that have a probable likelihood of generating 10% to 13% future earnings growth while trading at a P/E ratio in the 18x earnings to 22x earnings range. It's my ideal blend of value, quality, and growth. The Brexit effect on Schwab is minimal at worst if it involves additional regulatory hassle. At best, it is actually a boon for shareholders as higher trading activity allows Schwab's owners to get a small piece of each transaction. The 12% fall today, coupled with its minimal connection to Brexit activity, warrant a close look at this stock."
Since my June article, Schwab's stock is up 60%. Very little of that is supported by the fundamentals. The P/E ratio of the stock has climbed from 20x earnings to 31.5x earnings. In my view, this marks a shift from fair valuation to moderate overvaluation. Even with Schwab's continued high growth, the valuation has now reached a point where future returns will only be in the high-single-digit range even if the earnings continue in the 10-13% range as I predicted. For that reason, I would like to close out my recommendation on Schwab as a buy. It is now either a sell or a hold, depending on your own opportunity costs.
And lastly, on Saturday June 25th, I wrote an article titled: "Morgan Stanley (NYSE:MS): Approaching Financial Crisis Valuation Level." In that article, I argued that Morgan Stanley was a buy because it was trading at 8x earnings, and despite concerns about its earnings quality, the valuation had become so cheap that it merited an investment.
In that article, I specifically argued:
"This puts Morgan Stanley in a valuation territory that it has only seen once in the past 25 years (during the 2008-2009 financial crisis). With a current earnings power of $3 per share, the current P/E ratio on the stock in 8. That is very, very cheap. Its average P/E ratio during each year from 2010 through 2015 was the 11x earnings to 18x earnings range."
Since that June article, Morgan Stanley's stock is up 67%. The P/E ratio is now 16. That no longer offers the compelling terms that existed in June. Instead, it is trading at the high end of fair value range. For that reason, Morgan Stanley ought to be either a sell or hold. Personally, I would sell it because of its high debt burden, but the valuation is still within a zone of reasonableness so I understand that intelligent minds can disagree on this.
For those reasons, I close out my recent recommendations. At current prices, General Mills should no longer be shorted while Schwab and Morgan Stanley no longer possess the undervaluation to give clarity that they should be bought.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.