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Introducing The ValueScold


It's Only a Tulip?!

Valuation is Paramount.

When Will We Learn.

Let me introduce myself, the ValueScold.

I have been investing professionally in stocks for 37 years, as a broker, an institutional portfolio manager, and a hedge fund manager. Today I actively manage my own book without other people's money. No OPM. 

My investment views are not driven by relative performance or to capture big fee streams, but rather absolute risk and return potential. My investment horizon tends to be medium term, around 2-3 years for an idea to mature. This is both good and bad. In searching for the fat pitch, one can be too choosy, especially if they don' have to swing. 

I have a low valuation bias. Cheap is good, heck even reasonable can work with the proper growth and profitability can work. This doesn't exclude growth companies in many market environments. Unfortunately we are not in a normal market environment. 

Many types on companies are expensive in this low interest rate, TINA stock market. Yield is scarce and hence expensive in bonds, hybrids, utilities and REITs. Even MLPs, for most part which trade for 10-14x's ebitda because they pay out most of their cash flow. 

Nominal growth is slow in global economy so high revenue growth companies are expensive. Paying 50x's earnings or 10x's revenue for companies in their rapid sales growth phase is not uncommon for high growth technology and consumer shares. Software as a Service is the pinnacle of valuation levels. 

Defense is expensive and not just war machine companies. Consumer staples and food/beverages and the like. You gotta eat, even in a recession so Hershey's is safe at any price? But 2% organic growth for 25x's earnings?! You have to wipe after you eat too, but does that make Kimberly Clark a solid investment?

I am underwhelmed with the vast majority of stocks in today's market. I have written about shares becoming justifiably expensive in a low growth and low inflation, low interest rate environment. Well, that happened. I believe we are way past that stage. Valuation levels today are close to those of 2000 and the infamous tech bubble. 

But wait there's more! Valuations are far above those then from the median stock perspective. In the SNP500, the median Price to Sales ratio is in the 225% range. Back in 2000 it was close to 100% I believe as 50% of the SNP 500 market cap was considered old economy and trade at old school cheap levels. Again, rates are lower and profit margins higher so there deserves some secular improvement in price-to-sales ratios. But current levels are too aggressive, especially in many businesses which haven't proven profitable models yet. 

When it comes to valuations, I will call it as I see it. And politics, and policy, and economics and simple talking head blather. I will not pull punches nor avoid sacred topics. Most importantly I will try to put all things into proper perspective. In this soundbite media news cycle driven world, too little effort is devoted to perspective. This reduces the debate to right/left or bull/bear talking points with little factual support. I loathe that type of debate. 

I will search the domestic equity markets for low or reasonable valued businesses with some type of average or above average growth opportunities that when recognized could generate a large share price apprecation level over 2 or 3 years. I am not schlepping the usual cheap bank, auto, airline or home builder. They may be cheap stocks most of the time. The question remains if a cheap Exxon or Ford or American Airlines represents good value. I am not sure. The share prices have shown perhaps not.

I will attempt to find cheap stocks where the market discounts fundamental deterioration and I believe its over doing that. Or companies with growth stumbles where the mo-mos and day traders puke out positions in decent businesses to low temporary valuations. Or the companies are undiscovered micro caps and have yet to find sponsorship on the street. 

The common thread of my longs will be that they are simply too cheap not to own if their fundamental growth plans develop as I and management expect. If the business delivers to plan and the market pays for that growth, there can be large gains in these types of longs. Naturally buying shares with "hair" will entail some risk. My long book tends to have some very big winners but also a bust or two. I cant tell which are which in advance. 

I hope that my research process will be educational and balanced enough so that the reader can make up his or her own mind on the position. Remember perspective is very important in my process. This means some math along with the story. But no worries, its simple arithmetic. I will use numbers to chart earnings outcomes versus history and peers as well as valuation driven price targets. Many investors short change themselves, not by ignoring current numbers but by not putting them into enough perspective.

Like tulips a while ago. There's a charming commercial running on CNBC these days tracking the Dutch tulip mania in the 1600s. As prices continue to soar thru insanely speculative levels, the bubble keeps expanding until someone at  auction asks, why so much for a tulip, its only a tulip?  

Perspective my friends. It's only a tulip.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.