Is Your Investment Story Profitable?
Successful investors have a story that drives their investment decisions. A prime example is Warren Buffett who notes that the U.S. stock market prospers on the back of a growing U.S. economy. He looks for companies that reliably generate profits year after year and is a disciple of the intrinsic stock value approach to investing as he was, in fact, a student of Benjamin Graham who discovered that approach. So, the man who is perhaps the most successful investor of all time has a simple story that drives his investing. Is your investment story profitable?
Simple Investment Stories
The concept of investment stories came to mind after reading an article posted a couple of years ago by Motif. They noted that simple stories drive markets. The article is a good read as they look at investment themes that dominated investing during various periods and how those themes worked out over the longer haul.
You know that adage, “stocks are sold, not bought”? What often drives stocks are simple, plausible stories. In fact, Nobel-winning economist Robert Shiller has made the case for how both financial markets and economies are heavily influenced by stories.
Investors often call these stories their “investment thesis.” We at Motif like to call them themes, ideas, trends, or motifs. We believe it is far more intuitive for investors to think this way rather than the traditional investment “style boxes” used by mutual funds or risk premium “factors” favored by academics. For example, “small cap value,” which combines academia’s two favorite factors into a mutual fund style box, doesn’t resonate with most investors.
We ask, is your investment story profitable? We might also ask if the current investment story will continue to be profitable or will collapse like a house of cards bringing on another stock market crash, financial crisis, and financial ruin for many. While the Buffett investment story is for long term, buy and hold investors, there are perfectly profitable investment stories for the short term. But, they require that you are able to get in at the right time and get out while the getting is still good.
An example they bring up in the Motif article is the stimulus to the market by ultra-low interest rates in the years following the financial crisis.
For example, the market’s belief in the power of the Fed’s experiments with ultra-low interest rates and quantitative easing (QE) helped drive the S&P 500 much higher from 2010 to 2014, though those policies may ultimately prove disastrous in the long run, as market bears believe.
Right now, no one, including the Fed, knows the long-term impact of these actions. But much to the chagrin of market bears, until a bear market disaster finally hits, financial markets can and do move significantly higher than one may expect based on pure fundamentals, such as earnings growth, cash flows, price-earnings ratios, credit spreads, and yield curves.
The same to a lesser degree can be said for the Trump tax stimulus which put a lot of money in the hands or corporate America, allowed for repeated stock buybacks, and may well have keep the market up in the last year. A problem with stories is believing in them after they are no longer true or believing in a story when something else is what is driving the market. This is when investors overstay their welcome and not only see their dreams of profits go up in smoke but watch their investment capital go the same way as well!
Is Your Investment Story True?
There is a lot of hype in the markets, especially when a company wants to float an IPO. There are also stories offered by companies that have fallen on hard times and are hoping that they can attract new investors and keep their stock price from falling too drastically. We have written that dividend stocks can be perilous when an investor just looks at the size of the dividend and does not do any fundamental analysis of the company involved. If a company’s stock falls precipitously and they do not change their dividend, investors may be attracted by a 12% or 15% dividend which will disappear in a flash the next quarter as the company “regroups.”
Kraft Heinz Products
An investment story that turns out not to have been as true as we might have liked is Kraft Heinz. This was considered a “widow and orphan” stock, solid with a good dividend. But, these folks have not keep up with changing food tastes and preferences of the American consumer. As such, any attempt at creating a story about this stock in preparation for a recovery are met with skepticism and the suspicious that this stock is now a value trap. Nevertheless, there may be smart enough investors out there who will be able to anticipate when Kraft Heinz has fallen enough to be a good buy again. Then the story needs to be the recovery of a grand old company. Time will tell on this one.
What Will the Boeing Story Be?
We just asked in a recent article, Why Invest in Boeing? We were pretty positive about this company as a long term investment based on their technological expertise and dominance across several areas of aerospace endeavors. But, now there have been two crashes of the new 737 Max 8 jet and both China and Indonesia have ordered these jets to be grounded until the problem can be figured out. It is especially worrisome that some experts are saying that new automated technology designed to make these jets safer may have malfunctioned and caused both planes to crash shortly after takeoff.
Boeing fell 11% on the news and could fall more if these events lead to a general discomfort with Boeing technology. Investors in Boeing will need to decide what they investment story is with the aviation giant and be ready to change that story as events unfold!
Boeing 787 Dreamliner
Constantly Re-evaluating Your Investment Story
If your investment story is the same as Warren Buffett’s, you have two tasks to perform. One is to simply keep track of the growth of the American economy and the other is to find and analyze prospective investments. But, if your investment story is the story of the day such as the growth of emerging markets, the migration industrial production out of China and into other Asian economies, or a miraculous resolution of the Brexit mess, this will require constant attention and a good hand at market timing.
A good investment story that lets you sleep at night may be less profitable but a red hot investment story that makes great short term profits may be the stuff of headaches and ulcers.
When Are Cheap Investments the Best Investments?
A couple of years ago we wrote to beware of penny stocks. The point being that cheap investments are not necessarily good investments. After all, there is probably a good reason why a stock is selling for a low price. On the other hand, companies that are just starting out and are not being watched by Wall Street analysts may be very promising but no one is watching. The bottom line for stock value (as opposed to price) is intrinsic stock value. When you have unique insights about the stock in question and the big guys are not watching, you can often make very profitable investments in this area. In this regard we got to thinking, when are cheap investments the best investments?
The Largest Valuation Gap in 70 Years
CNBC writes about the current gap between cheap and expensive stocks. This is called the valuation gap and it is historically large. The last time there was such a difference between the high flyers and the lowest echelons of the stock market was when Harry Truman was President, the world was ravaged from World War II, and the Korean War was brewing.
For investors struggling to find opportunities after a stellar rebound in the aging bull market, value stocks might be the best bet.
Case in point: Cheaply priced stocks are getting cheaper as expensive stocks have gotten extremely pricey, pushing the valuation gap to the widest in 70 years, according to AB Bernstein. The record dispersion puts cheap equities in a sweet spot as other pockets of the market start losing the appeal because of their high prices.
What the analyst emphasizes is that the best time for buying value stocks is the point at which valuations have been spread out the most. Many analysts have commented that this must recent upsurge in the stock market is certainly not being driven by value and fundamentals as earnings are getting worse and growth projections in the USA and abroad are not very positive.
Stock Market Valuation Gap
What CNBC says is from a technical perspective as they look at value stocks as a technical factor. It turns out that when valuations surge to extreme levels, the value stocks whose prices have been left behind tend to outperform in the coming six to twelve months.
Of course, for long term value investors, when fundamental analysis of a stock shows value and the price is low, this becomes a historic buying opportunity.
Unique Investments in Industry “Disruptors”
In this case, we take a look back a couple of years at Trade Desk which was selling for $29 a share after its IPO in September of 2016 and was trading at $49 as recently as May of 2018. Since then the stock has taken off and is pushing $200 a share today. When are cheap investments the best investments in cases like Trade Desk? It is when they change how things are done in an industry or even create entirely new sectors. When this happens it often takes insight more so than analysis of fundamentals to get in when the valuation is still cheap. But, companies like Microsoft and Apple were similar stories back in the day and have routinely offered buying opportunities along the way.
Doing Your Homework on Cheap Investments
Yahoo Finance looks at cheap stocks as well and suggests 7 cheap stocks with potential for price appreciation. They also offer a note of caution about just looking at the cheap part!
Stocks under $5 usually aren’t the best stocks. After all, almost every company prices their initial public offering at $10 per share or more. Thus, if a stock is trading under $5, that means the stock has most likely been subject to a 50%-plus sell-off, which is a sign that the company is having major trouble.
For this reason alone, stocks under $5 should be classified as high-risk stocks by investors.
But, some of them should also be classified as high-reward stocks. Again, stocks under $5 got there because investors sold them in bunches. That means investor sentiment surrounding these stocks is depressed, and expectations are low. If the company can top those low expectations and sentiment dramatically improves, these same really beaten up stocks can become huge overnight winners.
They mention both Snap and Pandora with both doubled in stock price recently. The seven that they offer as buying opportunities are these.
Blue Apron: makes meal kits
Pier 1: Struggling but possibly recovering retailer
Big 5 Sporting Goods: sells sporting goods
Groupon: coupon and savings platform whose demise is not imminent
Francesca’s: woman’s clothing retailer up for acquisition
Blink: charges electronic vehicles
Sirius XM: broadcasting
The arguments for buying these stocks range from “all of the damage has already been done” to “putting their house in order” to “just wait until the need for their services catches up” which is the case for Blink as more and more electronic vehicles are sold.
In each case, investors should be wary and should realize that these stocks are risky propositions. And, in every case, these are not stocks to buy hold and forget about unless you have an investing “death wish!”
Recognizing the Right Value Story
There are times when the stock of a company is falling like a rock and everyone is bailing out, only to discover that the investment makes a huge comeback. One case in point was Sears several years ago. Yes, Sears was the leading retailer, fell behind the times and lost pretty much everything. Even today it is in trouble. But, in the early days of its demise the stock made a huge comeback. This was because investors finally realized how much property Sears owned!
Unencumbered property is generally considered part of a company’s margin of safety. However, in the case of Sears, they were unable to change how they did business, stay ahead of the issue of online sales, and only delayed the inevitable by selling their real estate arm to General Growth in 1995.
Nevertheless, for anyone who looked past Sears as a cheap and dying stock, recognized them as a real estate investment, and then purchased shares, it was a great investment. However, that factor only lasted while it lasted, making Sears a very good investment for a very short time.
Sears Was Briefly a Great Investment
When Are Cheap Investments the Best Investments?
The moral to this story is that cheap investments are the best investments when the market is looking elsewhere, when there is overlooked value, and when market enthusiasm drives up valuations into the stratosphere while leaving value stocks behind. Such may be the case today.
Why Invest in Boeing?
Not long ago we wrote about whether or not Boeing would need to outsource production in order to remain profitable. That question largely had to do with the threat of a long-term trade war and Boeing potentially losing markets as a result. The trade war may well be on its way to at least a temporary resolution so the question is why invest in Boeing over the long term? Essentially Boeing is a cash cow with a dominant position in an increasingly higher and higher cost of entry business. Its only real competitor is Airbus as the two of them control more than 85% of the commercial aviation market.
Boeing
Boeing was founded by William Boeing in 1916 as Pacific Aero Products Co. He changed the name to The Boeing Company two years later. In 1997 Boeing merged with McDonnell Douglas in 1997. Boeing is the largest US exporter by dollar amount. The company ranks number five in the world as a defense contractor. Boeing manufactures and sells airplanes, rockets, satellites, and helicopters of its own design. It also leases products and provides lifetime product support to everything that it sells.
High Cost of Entry Business
Why invest in Boeing? Our first reason is that they are in a high cost of entry business. They deal in state of the art, high technology, and produce very expensive products, which they are able to routinely sell at handsome, profits for years and even decades. The amounts money needed to compete in this arena are huge, the skill sets needed take decades to develop, and the base technologies are closely held.
State of the Art Jets
The most recent major addition to Boeing’s fleet of jets is the 787 Dreamliner. This wide-body, long haul, mid-sized jet is roughly a fifth more fuel-efficient than its predecessors and competitors. Built with composite materials, the plane is lighter and cheaper to operate than other jets of comparable size and range.
Its noise-reducing features are state of the art as are it mostly electrical flight systems. The jet entered testing in 2009 and finished testing in 2011. Boeing spent roughly $32 Billion developing this jet.
Boeing 787 Dreamliner
Not only did Boeing spend $32 Billion in development, but also it took just over 10 years from concept to a flying and sellable jet. Now the 787 is a mainstay in the commercial aviation market and Boeing is looking to develop the next start-of-the-art commercial jet. The only other company with comparable resources is Airbus.
Missiles and Satellites
Going back to the Minuteman missiles in silos across the wheat fields of North Dakota and grasslands of Montana to the current partnership with Lockheed Martin in the United Launch Alliance, Boeing has been in the rocket business. They still maintain missiles for the US nuclear deterrent and run the United Launch Alliance with Lockheed Martin. They maintained the Space Shuttles when that program was still running. This is again, a high cost of entry business that takes huge amounts of resources, state of the art technological skills, and the capacity to guard what are essentially state secrets forever.
United Launch Alliance Orion
Boeing does this work and does it at a profit as part of its Defense, Space, and Security division. This company is one of the mainstays of US military readiness and able to make a steady profit year in and year out.
Why Invest in Boeing?
As we so often come back to on these pages, long term successful investing depends on the analysis of intrinsic stock value and Boeing has this is spades! The company routinely makes money. This ability starts with the ability to turn new technology into marketable products. But, it is more with Boeing because they have such a wide range of skills and virtually control the commercial jet business along with Airbus. When they have to, they share little and inconsequential parts of their knowledge base to do offshore fabrication to maintain customer bases. Then they do all design, critical manufacturing, and assembly in the USA.
Adding Boeing to Your Portfolio
The Motley Fool writes about 3 Stocks to Build Your Portfolio Around. The first on their list is Boeing.
If you’re looking for one stock to build your portfolio around, one great company you can count on to hold its value over time while paying you a steady dividend, I can’t think of a better place to start than Boeing.
In business for more than a century, Boeing clearly has staying power. This company isn’t going to disappear until someone invents a better way to move quickly over long distances across large bodies of land and water. And while Boeing doesn’t have a monopoly on building planes, it arguably has the next best thing: an oligopoly between it and its rival Airbus, which between them account for roughly 88% of all commercial aircraft revenue.
With $13.6 billion in annual free cash flow to back up its $10.5 billion in reported earnings, you know that Boeing’s earnings are of exceedingly high quality, and more than sufficient to cover the dividend. Boeing’s payout ratio, in fact, is a very low 38%, meaning that only 38% of earnings suffice to pay the entire dividend.
Boeing has been paying dividends for decades and has been steadily increasing their dividend for the last seven years.
Boeing is a major player in commercial aviation and in the defense industry. This allows it to use technologies and skill sets developed in one arena and apply them to another. They are also important to the US economy as the exporter who rivals all of US agriculture in how much money they bring back to the USA. Although Boeing has substantial cash reserves, they do not have a large hoard of cash offshore.
There are certainly companies that have grown faster, but as the folks at The Motley Fool note, until someone invents a new technology for moving people and cargo quickly from one continent to another, Boeing will have customers. And, as higher technical skills make that job more efficient and profitable, Boeing will remain at the head of the line.
another, Boeing will have customers. And, as higher technical skills make that job more efficient and profitable, Boeing will remain at the head of the line.
How Can You Invest in Artificial Intelligence?
Back in the day when Jobs and Wozniak invented the Apple computer they simply used existing technology to provide folks with their own personal computer. As computer technology has advanced over the last forty years it has been incorporated into PCs, laptops, tablets, and smart phones. Investors who profited were the ones who put their money in companies that made the best use of better and better technology. Today the “new wave” of technology is artificial intelligence. How can you invest in artificial intelligence? There are not very many companies that are pure AI investments. But, many of the tech giants and others are using AI for advanced products and services. The key to profits in this arena will be in the use to which AI is put and the profit potential of that application.
Artificial Intelligence
Computers can process information much faster than humans but can they think? The concept of artificial intelligence goes back to the 1950s and Alan Turing (inventor of the computer system that cracked the German Enigma Code). Turing wondered if we would ever create machine that could “reason at the level of a human being.” The “Turing test” is that “computers need to complete reasoning puzzles as well as humans in order to be considered thinking in an autonomous manner.”
A more current view is that in order to have artificial intelligence at computer system must display intentionality, intelligence, and adaptability.
Intentionality
A key feature of the algorithms that make up artificial intelligence is that they allow computers to make decisions. They do this by having access to vast amount of digital information, having remote sensors, and having incredibly fast processing power. Thus such a computer system can process huge amounts of information almost instantaneously to make real world decisions. The use of artificial intelligence in self-driving cars is a prime example.
Self-Learning (Intelligence)
Artificial intelligence systems learn from their mistakes and can correct their programming to avoid making the same errors again. Such systems can keep learning and improving their performance. They can spot relevant information within huge amounts of data and make predictions that even intelligent humans would find hard to make. Such systems require intelligent programming as well because the system needs useful input to make useful predictions.
Adaptability
A key feature of artificial intelligence is that the smart, decision-making, and self-learning system can adapt. They learn from their own experience and this takes them beyond what the programmer or database might have predicted.
(Brookings Institute, What Is Artificial Intelligence?)
Alan Turing
Self-Driving Vehicles
The reason why artificial intelligence can be applied to self-driving vehicles to day is because of the speed of data processing, size of databases, improved remote sensors, and programming that ties all of this together. The programming sets the parameters for the autonomous vehicle and then it learns “on the road.”
The Data Driven Investor writes about artificial intelligence and autonomous vehicles.
The automotive AI market reported that it is expected to be valued at $783 million in 2017 and expected to reach close to $11k million by 2025, at a CAGR of about 38.5%. IHS Markit predicted that the installation rate of AI-based systems of new vehicles would rise by 109% in 2025, compared to the adoption rate of 8% in 2015. AI-based systems will become a standard in new vehicles especially in these two categories:
- Infotainment human-machine interface, including speech recognition and gesture recognition, eye tracking and driver monitoring, virtual assistance and natural language interfaces.
- Advanced Driver Assistance Systems (ADAS) and autonomous vehicles, including camera-based machine vision systems, radar-based detection units, driver condition evaluation and sensor fusion engine control units (ECUs).
Deep learning technology, which is a technique for implementing machine learning (an approach to achieve AI), is expected to be the largest and the fastest-growing technology in the automotive AI market. It is currently being used in voice recognition, voice search, recommendation engines, sentiment analysis, image recognition and motion detection in autonomous vehicles.
So, how can you invest in artificial intelligence? We recently asked if it is time to buy GM based on their moving into electric and autonomous vehicles. We noted in that article that the self-driving car market could be worth as much as $7 Trillion by the middle of the century!
The Many Applications of Artificial Intelligence
Investor’s Business Daily writes about artificial intelligence stocks and notes, as we did, that although there are few companies that are strictly AI investments there are lots of companies applying the technology to their products and services.
It’s no secret that Alphabet (GOOGL), Microsoft (MSFT), Facebook (FB) and Amazon.com (AMZN) are all spending big bucks on AI technology. The tech giants are putting AI in consumer products and services, such as voice-activated smart home devices. Amazon, Google and Microsoft also are pushing AI technology into cloud computing.
Other companies highlighted in the article are IBM, Accenture, Epam Systems, Adobe Systems, Salesforce.com, Trade Desk, MTCH, IAC, Five9, Nvidia, Fortinet, Palo Alto Networks, VISA, and MasterCard.
The point is that artificial intelligence will have many possible applications. And, it will be how effectively a company applies the technology that will make the difference for the investor.
Selling Picks and Shovels Instead of Digging for Gold
A famous observation from the days of the 19th century California Gold Rush was that you were more likely to prosper selling picks and shovels to eager miners than by digging for gold yourself.
This thought may apply to the field of artificial intelligence as well. Applications of this advanced technology require lots and lots of advanced chips. The leader in this area so far is Nvidia but companies like Tesla are now starting to design and manufacture their own chips.
Forbes reported on why Tesla dropped Nvidia’s AI platform last year and replaced it with its own.
According to Musk, the Nvidia Drive PX2 computing platform – with one Pascal GPU and 2 Parker processors or CPUs – currently used in Tesla’s custom autonomous computerAutopilot Hardware 2.5 can process 200 frames a second, compared to “over 2,000 frames a second” with full redundancy and fail-over with Tesla’s designed computer.
Nvidia supplies chips for the likes of Mercedes and Honda. To the extent that a maker of self-driving cars wants to buy their chips instead of building that technology from the ground up, they will use someone like Nvidia, a leader in the field.
Waymo Self-driving Car
What Was Wrong at Kraft Heinz?
Last week the stock of the packaged food giant, Kraft Heinz, took a nosedive. The stock fell by 28% on news of a SEC investigation of the company’s accounting practices but more so the nosedive was due to gigantic losses in the last year. The package food business is very competitive and companies need to balance quality, price, advertising, and new product lines in order to stay competitive as much so as to gain an advantage. What was wrong at Kraft Heinz was that they seem to have lost their way. Cost cutting became the order of the day in order to maintain healthy profit margins. But, consumer tastes are always evolving and old, tried and true products can easily lose ground, especially in an era when everyone wants “organic.”
Kraft Heinz
Kraft Heinz was formed just a few years ago in a merger of two companies with hundred-year histories, Kraft Foods and Heinz, the famous ketchup maker. The deal was pushed by none other than Warren Buffett and is a classic Buffett investment. The so-called “Oracle of Omaha” only invests in companies when he fully understands how they make money and how they will continue to do so for years on end. The company formed by two packaged food stalwarts was a typical Buffett investment and is company, Berkshire Hathaway, owns slightly more than a quarter of Kraft Heinz stock shares.
Management sought to make the company more profitable by cutting $1.7 Billion in “excess costs.” And, prior to the recent debacle, Kraft Heinz as returning more per shareholder dollar than competitors like General Mills. That is no longer the case!
The company traded for $80 a share after the merger and from early 2016 to the middle of 2017 rose to the $90 range. Since that time the cost cutting at Kraft Heinz was not working so well as the share price gradually fell to the upper $40 range. Then the bombshell exploded.
Kraft Heinz Stock Price
CNN reported that Kraft Heinz posted a huge loss and revealed an SEC investigation.
Kraft Heinz wrote down the value of its Kraft and Oscar Mayer brands by $15 billion, posted a $12.6 billion loss, cut its dividend by 36% and announced its accounting practices are under investigation by the Securities and Exchange Commission.
Some pundits have referred to an “existential crisis” for Kraft Heinz. On the other hand, Warren Buffett who holds a fourth of the stock and suffered a loss of more then $4 Billion, says he expects to be holding the stock five years from now. His comment was that management seems to have gotten confused about cost cutting and consumer tastes.
Millennials, Organic Foods, and Amazon.com
A strong “selling point” for Kraft Heinz, General Mills, Unilever, Mondelez International, Nestle, and the like is that they have products with strong brand name recognition. Kraft macaroni and cheese, Heinz ketchup, and Oscar Meyer processed meats have been around for a long, long time. But, does the generation of millennials want these products or something with the label “organic?” Now that Amazon.com is running Whole Foods, there is a huge marketing machine pushing organic foods and the convenience that Amazon.com has created with home delivery.
The take home point from what went wrong at Kraft Heinz was probably that they quit thinking about what the consumer wants and thought their product line was golden and would sell forever. So, they focused on cutting costs. It is amazing really how such a large company with so many bright people could have missed this at their stock faltered over the last couple of years.
Kraft Heinz Products
Beware of a Visit by the SEC
CNBC reported the SEC subpoena.
Kraft also disclosed the SEC subpoena is part of an investigation into its procurement and accounting policies. The company said it launched an internal investigation into the matter after receiving the subpoena. Following its investigation, Kraft Heinz said it posted a $25 million increase to the cost of products sold after determining it was “immaterial to the fourth quarter of 2018 and its previously reported 2018 and 2017 interim and year to date periods.”
This may be a minor issue, blown out of proportion due to the huge stock loss and inventory write down. Or it might not be. Kraft Heinz has enough problems right now and does not need to have the SEC on their doorstep. But, that is how it is.
Is Kraft Heinz a Stock to Buy Right Now?
We write frequently about intrinsic stock value and long term investing. When a stock takes a hit but the company still has the ability to generate good profits over the long term, it is a good buy for a long term investor who is willing to wait and whose preferred length of holding a stock is forever. The issue with Kraft Heinz is if they can revitalize their old product line, add new items, spiff up the old ones and do so in such a manner as to bring back sales, profits, and their stock price.
It is of interest that Warren Buffett says that he believes he will holding that stock in five years. That is a good vote of confidence. On the other hand, he might be expected to say that in order to stock the decline of the Kraft Heinz stock price. In the case of Berkshire Hathaway’s investment in Kraft Heinz it will be instructive to see if they buy more of the stock, sell the stock, or simply hold their ground in the coming months.
The concern for long term value investors is that Buffett got it wrong this time around and that Kraft Heinz is now selling at its appropriate price considering the changes in the packed food industry and its aging product line. If that is the case, this is not a stock to buy and wait for bounce or recovery and not a stock to hold for the long term!
Panic Buying of Investments Is a Bad Sign
A friend of ours commented recently that panic buying of investments is a bad sign. He is old enough to remember when the three Hunt brothers tried to corner the silver market and failed.
Panic Buying of Silver in 1979 to 1980
The boom and bust of silver prices is remembered as Silver Thursday, March 27, 1980. Silver was trading at around $6 an ounce in early 1979 and as the brothers purchased increasingly larger amounts of silver on margin, the price rose to $49.45 by January 18, 1980. By that time the three Hunt brothers controlled a third of all silver on earth that was not in government hands!
Our friend commented on how people were taking money out of their bank accounts to buy silver as the price went up. Specifically, when the plumber came out to fix a leaky pipe at our friend’s home, the plumber confessed that he had “invested” his life savings of $30,000 in silver bullion so that he could retire soon.
The sad fact of the matter for our friend’s plumber is that the COMEX tightened margin requirements with Silver Rule 7 and when the price of silver fell ever so slightly, the Hunts did not have the cash to meet their margin call of $100,000,000. They had to sell at huge losses and the price of silver fell by half in just four days. Silver traded at $15 an ounce by June of 1982 and at $6.46 in January of 1993.
Needless to say the plumber lost a large portion of his life savings.
Hunt Brothers Testifying before Congressional Committee
Panic Buying of Bitcoin
Our friend is now well into retirement and living in Latin America. He met a realtor in the coffee growing and mountainous region of Colombia when looking at property there. This was in December of 2017. While Bitcoin had started the year at $900, it was approaching $20,000 and everyone wanted to know how to join in the profits. The realtor admitted that she had emptied her bank account and bought Bitcoin at $15,000. She was so pleased that her investment had gone up right away and that her Bitcoins (3 of them) were worth $19,000 each! She, like the plumber two generations before, envisioned an early and comfortable retirement.
Our friend used his best Spanish in trying to relate the story of the plumber, the Hunt Brothers, and the boom and bust of silver. The lady kept talking about how anyone with any sense should be buying Bitcoin right now (¡Ahora Mismo!).
Bitcoin peaked on December 17, 2017 at $19,783.06 and by December 22 was selling for $13,800. By February 5, 2018 you could buy a Bitcoin for $6,300 and by Halloween the cryptocurrency had stabilized at $6,300.
Our friend has not had any further contact with the realtor but suspects that any plans for an early retirement have been put aside indefinitely.
Bitcoin Debacle
Panic Buying of Investments Is a Bad Sign
The twin demons of investing are fear and greed. Warren Buffett has often been quoted to the effect that the time to buy is when everyone is afraid and selling their investments and the time to sell is when everyone is buying in a panic. The point is that stocks, real estate, commodities, Bitcoin, and the rest all overshoot their fundamental or intrinsic value when investors imitate lemmings and march in large herds to their doom. This works both in bull and bear markets. And, because the memories of some investors are as short as those of the lemmings, it happens again and again and again.
Panic Buying of Investments Today
CNBC writes that panic buying is likely to drive up stock prices in the near term.
Stocks could get a short-term boost as fear of missing out on gains leads more investors to plow more money into the U.S. equity market, analysts said.
The S&P 500 rose more than 2 percent last week, posting its seventh weekly gain in the last eight. The surge in stocks comes as investors increasingly bet China and the U.S. will strike a trade deal in the near future. It also follows the Federal Reserve signaling it will be patient in tightening monetary policy.
The rationale of smart investors who are buying stocks today is probably that the trade war will averted at the last minute and that the stock market will resume its upward climb as the Fed backs off from its interest rate increases. Unfortunately, as we wrote recently, we could win the trade war and lose on investments.
What is important to note in the CNBC article is that they project a “short-term boost” and not necessarily a resumption of a strong and sustained bull market. In this regard panic buying of investments is a bad sign. Buying shares of companies like Apple, Amazon, or Microsoft today should not be compared to buying silver when the Hunts were cornering the market or when everyone went crazy about Bitcoin. Nevertheless, there are real concerns about the economy, both local and global, and particularly in over-grown and debt-heavy areas like China.
The Trump tax cut was, in the end, a bust for hiring and investment and will have added another trillion dollars to an already-huge US national debt. There may be hope for investment offshore in places like Brazil simply because they were hit so badly when commodity prices collapsed that they have room to recover and because they are still a developing nation with lots of infrastructure needs.
Take-Home Lesson about Panic Buying of Investments
The bottom line of this trip down memory lane is that panic is not a viable investment strategy. Whether you are scared that your investments will lose value or that you are missing out on an opportunity, jumping the gun and selling or buying in response to a moment of panic is a bad idea. Panic buying of investments is a bad sign for the markets because this usually leads to an overshoot in prices which will then correct, sometimes greatly. Then the latecomers to an investment will suffer all of the damage.
As we repeatedly advise our readers, doing routine fundamental analysis of your investments or investment opportunities is where to start. There are certainly times when investment opportunities arise and moving quickly is the only way to make a profit. But, smart investors limit their scope of investing to what they know and pass on getting into investments that they do not understand and where they cannot adequately assess the likelihood of future profits from increasing cash flow.
Time to Invest in GM?
General Motors was once the largest corporation in the world and the king of U.S. auto makers. Foreign competition ate away at its customer base and profits and the financial crisis dealt the final blow. In 2009 the once-king of U.S. automakers filed for Chapter 11 bankruptcy protection with US$172.81 billion in debts and US$82.29 billion in assets. The company divested itself of numerous assets keeping the Chevrolet, Cadillac, GMC, and Buick brands as well as controlling interests in numerous foreign automobile operations. After reorganization, the new GM emerged in a $20.6 Billion IPO in November of 2010. Any money invested in the new GM at the time of its IPO has doubled, counting dividends and stock appreciation. All of this having been said, is it time to invest in GM for the long term?
Is It Time to Invest in GM?
Simply based on its dividend of 3.9% and a share price that is just 6.1 times its projected earnings, GM looks attractive. This may well be why Warren Buffett increased the Berkshire Hathaway stake in GM to 37% and now holds 5.1% of GM shares. However, projected earnings that are the big question for all automakers these days. The industry is undergoing fundamental changes and only those automakers that adapt, innovate, and work with maximum efficiency will survive and prosper. If you believe that GM will lead the group of survivors, then you believe that it is time to invest in GM.
The factors that we see affecting the auto industry all derive from new technologies and the effects of these technologies on how we live, communicate, work, buy services, own cars (or not), and drive (or not).
Electric Cars
The leader in the field of commercially producing and selling electric cars has been Tesla. Tesla was founded in 2003 and after ten years of making electric cars was the best-selling manufacturer of plug-in electric passenger cars by 2018. They have delivered almost a quarter of a million electric vehicles and have a market share of 12%. Many in the auto industry see the electric car or electric-gasoline hybrids as the future of the auto industry.
And GM has been selling electric cars as well and is catching up to Tesla. According to Investor’s Business Daily, as if January of 2019 GM joins Tesla in the top tier of electric car sales, having sold more than 200,000 electric vehicles at which level the Federal Electric Vehicle Tax Credit starts to reduce. (Tesla passed this milestone in July of 2018.)
Tesla Electric Car
The issue with Tesla for years has been a huge amount of debt and not enough sales to show a profit. One of the factors that have supported Tesla has been the $7,500 tax credit for those who purchase electric cars. As the tax credit goes down, Tesla is having to sell their cars for less to make them competitive and this cuts into their attempts to make a profit.
In the electric car arena, GM needs to produce good cars to compete with and beat the likes of Tesla and do so at a profit. Those who believe that it is time to invest in GM also believe that GM can do this.
Chevy Cruze Electric Car
Self-Driving Cars
This may be a much smaller niche in the near term, but as computer technology and artificial intelligence advance, we may come to a point where all cars offer the option of letting the car drive itself. Seeking Alpha looks at the self-driving unit at GM and says it could be valued at more than the rest of the company combined. The writer predicts a world-wide autonomous car market of $7 Trillion by the middle of the century!
More information and detail about the autonomous vehicle market can be found at Allied Market Research.
Autonomous Vehicle Market by Level of Automation (Level 3, Level 4, and Level 5) and Component (Hardware, Software, and Service) and Application (Civil, Robo Taxi, Self-driving Bus, Ride Share, Self-driving Truck, and Ride Hail) – Global Opportunity Analysis and Industry Forecast, 2019-2026
As the complicated introduction indicates, there are a lot of players involved and a lot of pieces to this puzzle from the level of automation of the vehicle to the type of vehicle and how it will be used.
An autonomous vehicle also known as a self-driving vehicle uses artificial intelligence (AI) software, light detection & ranging (LiDAR), and RADAR sensing technology, which is further used to monitor a 60-meter range around the car and to form an active 3D map of the current environment. The vehicle is designed to travel between destinations without a human operator.
To accomplish this goal, the auto used LiDAR, RADAR sensors, and sophisticated computer software. Developing each subsystem and integrating all of it is a complicated task and must be carried out with maximum efficiency in order for a company to make a profit!
A lot of major automakers are working on this technology as are auto suppliers, technology providers and even service providers.
Automakers include General Motors, Daimler AG, Ford Motor Company., Volkswagen Group, BMW AG, Renault-Nissan-Mitsubishi alliance, Volvo-Autoliv-Ericsson-Zenuity alliance, Groupe SA, AB Volvo, Toyota Motor Corporation, and Tesla Inc.
Technology companies include Waymo, NVDIA Corporation, Intel Corporation, Baidu, and Samsung.
Additional companies are Robert Bosch GMBH, Aptiv, Continental AG, Denso Corporation, Uber, Lyft and Didi Chuxing.
That is a lot of folks to keep track of. The consensus of experts is that Waymo is the technology leader in this field followed by GM. Waymo, by the way, is a subsidiary of Alphabet (Google)!
The short version is that GM is one of the two leaders in work to developing, market and sell self-driving autonomous vehicles.
If you see GM as successful in this quest, it is time to invest in GM!
Waymo Self-driving Car
Who Is Going to Own Cars in the Future?
A factor to consider when investing in any automaker is that more and more people cannot afford to buy or least a car. And many of these folks live in large cities where public transportation is an option. These folks can rent a car by the day or even by the hour when they really want or need an automobile.
This may well reduce the overall demand for vehicles and put more cars into the hands of rental agencies and the likes of Uber. The ability of downsize as needed and the ability to sell to a global sales network will be important for future auto industry success.
Who Will Sell Cars in Asia?
Access for foreign markets will also be important to the success of automakers of the future. Despite the threat of a trade war and bullying from the current U.S. president, GM is likely to stay in China where its profit margins are better than in North America and where it and its partner have a decent market share. If you believe that GM is wisely staying where the business is, then it is tie to invest in GM. The concern about GM in China is not GM but China. The Land of Managed Capitalism has a bunch of problems, not the least of which is the trade war with the USA. Nevertheless, Asia is a grown area while North America and Europe are mature markets. A company that is smart enough to reduce production capacity where it is selling fewer cars and beefing it up where sales are still healthy is a good bet. Maybe it is time to invest in GM.
Win the Trade War and Lose on Your Investments
The trade negotiations between the USA and China are coming to a head. Will there be genuine gains for the USA? We have written how both the USA and China have issues that they see as crucial to their national prosperity and security in our article about if the trade war becomes permanent. However, neither side wants to suffer the economic pain that could come out of a protracted trade war. China, especially, is seeing economic difficulties on the horizon and needs to do something sooner rather than later. So, there may well be a deal forthcoming. However, from the USA point of view, it is probably possible to win the trade war and lose on your investments. How is that possible?
Win the Trade War and Lose on Your Investments
An article in Market Watch caught our eye. They note that a trade-war win might not be a victory for the stock market!
Sometimes losing can pay dividends in unexpected ways, and that seems particularly true in the case of stocks and trade.
For the past five decades, the U.S. stock market has comparatively outperformed when the trade deficit widened and vice versa, suggesting that even if the U.S. emerges victorious from its trade war with China, investors may have few reasons to rejoice.
At face value, it may seem counterintuitive, but for the U.S., which relies on trade to fuel its economic juggernaut, a deficit can actually be a sign that all is well.
They provide a graph that demonstrates how this has worked since 1970.
Trade Deficit versus U.S. Stock Price Index
How Will a Trade War Win Relate to the Stock Market?
We have no reason to dispute the figures provided by Market Watch. It would indeed appear that when the trade deficit goes up that the stock market rises too. And the opposite seems also to be true, at least for the last half of a century. But, a relationship does not prove cause and effect.
In the Market Watch article they note that when the rest of the world is doing well economically and the U.S.A. is not doing so well, US exports may rise but US imports will fall off because people have less money and buy less. So, the balance of trade is better but the stock market suffers. And, when the USA is doing well economically, people buy more foreign products and the balance of trade worsens. Thus the balance of trade worsens but the stock market goes up.
The point is that in the past both the stock market and the U.S.A. balance of payments have been driven by consumer spending in the U.S.A. albeit in different directions. Will this be the case with a new trade deal?
What Kind of Trade Deal Can We Expect?
Many believe that as pressure mounts on both sides to make a deal, that a deal will happen, but it will not be as comprehensive as the U.S.A. wants or needs. Both China and the U.S.A. see trade, intellectual property, and control of whole economic sectors as existential issues. Thus both sides want more than the other can give. This especially applies to the Chinese Communist Party which fears for its survival if it gives up its heavy-handed control of the Chinese economy and Chinese society. Thus, there will likely be a deal and continued wrangling over issues into the distant future. And, to the extent that a trade deal results in a better balance of payments for the U.S.A. that may not be a good thing for your investments. But, the reasons might be different than what Market Watch describes.
A bone of contention on the US side is that China makes promises regarding access to its markets and protection of intellectual property and does not follow through. The US negotiators want to build in automatic increases in tariffs that will kick in when the Chinese continue with their old tricks of promising and not delivering.
It could be that higher tariffs on Chinese goods may become a permanent part of the equation. Either Trump will raise tariffs because there is no deal or tariffs will be triggered by non-compliance on the Chinese side.
Tariffs and the Balance of Trade
Tariffs by themselves do not affect the balance of trade. Rather, the consumer’s choice to pick another product due to the high tariff-added cost of a foreign product my result in purchasing from a domestic producer. That is the ideal solution for the U.S.A. if it wants to bring more manufacturing back into the USA. However, the Chinese have taken over whole sections of industry. For example, 70% of electronic production capacity is now in China. The bad end result of high tariffs for US consumers is that they simply pay more for imports from China because nobody else is producing what the consumer wants! When that happens, it raises prices for consumers in the USA but does not help the balance of payments. And, because consumer dollars are now going to pay for tariffs, it hurts the economy as well. If that turns out to be the case, there will no longer be a better stock market when people are buying more foreign products.
What Can You Do?
One can always hope for the best, but smart investors will look for better opportunities. Those opportunities may lie offshore from the USA. Then the issue is how to find value investments offshore. We recently wrote about investing offshore in Brazil and in our most recent article about job cutbacks in China we mentioned using foreign direct investment data from the World Bank as a guide to where offshore to invest.
On the other hand, if the China give ground and really let US and other foreign companies into the Chinese market and if they really turn around and protect intellectual property, and if they finally loosen controls on private industry, there could be an economic boom in China that would benefit any number of US multinationals. But, while you are waiting for an outcome of trade talks, a little re-balancing of your portfolio to include a few offshore stocks might well be in order.
Foreign Direct Investment in Brazil
How Do Job Cutbacks in China Relate to Your Investments?
China has been the economic miracle of the world for decades. From Nixon’s visit in 1972 to its entry into the World Trade Organization to the current day, China has not had a negative growth year since 1978 and has average a 10% GDP growth rate. At the same time North American and Europe are ecstatic with an occasional 5% growth rate and typically languish in the 2% to 3% range. But, things are not all well in the Land of Managed Capitalism (by the Communist Party). Debt is rising and there is a potential for a long term trade war with the USA. Meanwhile, small and medium-sized businesses are laying off workers in China. For many of us, China seems to be a long way away. So, how do job cutbacks in China relate to your investments?
Small and Medium-sized Business Downsizing in China
The South China Morning Post is beginning a series about the China economy.
Chinese President Xi Jinping warned on January 21 that the Communist Party needed to pay particular attention to the risks to social stability from rising economic problems, as evidence increasingly suggests that the nation’s employment situation is deteriorating rapidly, particularly among small and medium-sized businesses.
An important aspect of this situation in China is that the prospect of a significant economic downturn is not just that there could be a recession or even an “economic hard landing” but that it could lead to significant social unrest. The article goes on to give examples of companies that have reduced their labor forces by more than 75%! The end result is survival, not repayment of debts or prosperity.
Closed Factory in China
Chinese economic statistics have always been suspect, so anecdotal evidence is often relied upon to get an accurate picture of what is going on. What is known is that China has taken over a lion’s share of production in many industries from the rest of the world. Seventy percent of world electronic production capacity now is in China and the risk of a permanent trade war is taken very seriously, especially considering the amount of debt that companies and whole industries have taken on. As noted in the South China Morning Post article, many smaller Chinese businesses got into the habit of simply borrowing, expanding, and having enough money to service their debts. Now the world is changing and companies are downsizing very rapidly.
How Do Job Cutbacks in China Relate to Your Investments?
China ADRs
The first point of concern would be investments that you might have in Chinese companies. Investing.com lists 403 Chinese companies with ADRs available in the USA. If you are invested in any of these, you need to do your fundamental analysis and make sure if you want retain the investments in your portfolio or not. If you do not believe that you can do an accurate job at this because of sparse data, it might be better to sell.
Offshore Investing
The next issue is any other investment you might have offshore from the USA. We recently wrote about how offshore investment in Brazil was starting to look promising with the new government. But, Brazil and other exporters of raw materials will all have the same problem if China experiences a significant economic slowdown and quits importing at its current rate. The resource curse of boom and bust cycles is inherent in commodity exporters. There are relatively secure value investments offshore but you need to do your homework to find them and to assess their intrinsic value.
Direct Foreign Investment as a Guide
To know where to put your money offshore, a useful resource is the World Bank’s Foreign Direct Investment page of statistics. The most recent figures show that worldwide foreign direct investment was $2 Trillion in 2017, down from $2.5 Trillion in 2016. China received $168,223.58 million ($168 Billion) in 2017 versus $354,828.00 ($355 Billion) for the USA.
Meanwhile the European Union as a whole received $604,920.21! And Brazil came in at $70,685.05. It would appear that as the world economic situation worsens that money is flowing into developed economies more so than developing economies. Since this is where the smart money is going, smart investors will probably follow suit.
The World Bank updates these figures every year so it is always a useful resource for those wanting to invest offshore.
How Investments in the USA Will Be Affected
An old friend of ours recalled when the stock market crashed in 1929 and all of the businessmen in his small Midwestern town were not worried. New York was a long ways away and what happened there would never affect the prices of corn, soybeans, beef, pork, or eggs. Three years later our friend was burning corn cobs in his stove to keep the office warm because corn was cheaper than coal. The US Congress has picked a trade war with the Smoot Hawley Act and the US economy entered the Great Depression.
Great Depression Lineup for Free Food
If you think that what happens in the country that consumes more natural resources than anyone else does not matter in the rest of the world you are dead wrong. Companies like Boeing, 3M, Procter & Gamble, Deere, Caterpillar, Apple, and many many others derive a substantial portion of their incomes from trade with the rest of the world and with China in particular. When a company in China lays off 700 of its 1,000 workers, those workers have no jobs or take lower-paying temp jobs. The effects ripple through the economy and more companies lay off more workers and the downward cycle continues. The growing Chinese economy has been a consumer of many Western products. We in the West would like to have more access their economy and that is a lot of what the looming trade war is all about. The risk is that China will not open up to the West but will look inward instead. Apple already downgraded its projections for China for the coming year. This is how job cutbacks in China relate to your investments if you have multinationals in your stock portfolio. Trouble in China will spread to many developing nations and sales of goods by the USA will suffer.
The one bright spot for the USA and other developed economies is that foreign direct investment and cash via the Forex market will seek safe havens in these economies.
What Can You Do?
Some time back we wrote about how to invest without losing any money. As economic risks increase a wise investor will rotate part of his or her holding into AAA bonds (Microsoft and Johnson & Johnson, US Treasuries, and even CDs at the local bank. Any stock investments should be value investments until the economic situation in China and elsewhere improves. If the economy and market worsen, there will likely be quite a number of deep value investments for those willing to do their homework.
How Do Job Cutbacks in China Relate to Your Investments? PPT
Choosing Deep Value Investments
Many investors are pessimistic about the prospects of their investments in the coming year. In this regard we are looking at the process of choosing deep value investments. We see the pessimism in that stocks are rising on tepid earnings reports as The New York Times reports.
Late last month, chip giant Advanced Micro Devices reported disappointing financial results for the fourth quarter and warned that its first quarter performance would be weaker than expected. The stock surged 20 percent. A couple of days later, General Electric reported one of its skimpiest quarterly profits of the century, badly missing analysts’ forecasts. The company’s stock posted its biggest jump in nearly a decade.
In recent weeks, numerous companies including Wynn Resorts, Ford and JPMorgan Chase have missed Wall Street forecasts, only to see their stock prices rise.
It’s a classic relief rally.
In other words, investors expected further reports of bad earnings, were bracing for such reports, and were relieved that things were not as bad as anticipated! That is a heck of a way to start out the year! If you are good at choosing deep value investments, you will pick stocks that have been or will be beaten down and which will recover and provide you with great earnings and dividends for years to come. If you are not so good at choosing deep value investments, you will lose money time and time again.
Three Stock Market Perspectives
Deep Value Investing
What is deep value investing? Several years ago CNBC explained the concept.
PIMCO defines deep value investing as investing in stocks that are significantly undervalued based on their intrinsic worth (determined by asset-based or cash flow valuation).
When you find such an investment, it will typically have been unfairly punished by the market for any of a variety of reasons. Thus, its share price will have fallen and investors who see the falling share price may punish it further in the belief that the stock is ready to collapse. When this stock is a potential deep value investment, the market is not looking at its intrinsic stock value but rather at short term market price performance.
Deep value investing is a great concept and very profitable if you can do it right. Warren Buffett famously made a huge investment in Coca Cola at the end of the 1980s when the stock was languishing at 82 cents a share (factoring in stock splits since then) and today a share sells for $49 today. The Coca Cola dividend has a 3.16% yield based on the current price. That works out to be $1.55 a year. This is nearly double the share price when Buffett chose KO as a deep value investment! Choosing deep value investments and doing it correctly leads to great long term profits. The rub is how to do the job properly.
Choosing Deep Value Investments
One way to do this is to follow the advice of others. For example, Seeking Alpha recently touted 3 deep value dividend stocks that they believe will beat the market over the long term. The three picks are CVS Health, Qualcomm, and Vodafone. Here is the summary of the article.
Deep Value contrarian dividend stocks can be a powerful investing strategy that leads to both great income and market-crushing returns.
But investors have to be careful to weed out good opportunities from yield/value traps that could lead to permanent losses or chronic underperformance.
Qualcomm, CVS Health, and Vodafone are three deep value dividend stocks my new portfolio bought this week, because I’m confident the market is excessively bearish on these companies.
While each has very real risks investors need to be comfortable with, ultimately I’m confident that from today’s deeply discounted prices you’ll enjoy a safe dividend and great returns in the future.From current valuations (28% to 45% discount to fair value), I expect each of these companies to generate at least 18% long-term total returns.
So, how does this analyst go about choosing deep value investments? They stick to blue chip stocks that have recently lost ground in the market and which are strong on fundamental analysis.
It is a long article with a lot of detail but the bottom line is the need to distinguish between beaten down stocks with value and just plain value traps that will eat up you money time and time again. When we wrote about intrinsic stock value, we noted that this valuation is based upon projected future cash flow. Going back Buffett, he uses this approach continually and has been quoted as saying that he and his associates throw out 95% of the stocks they look at as too tough to call.The “Oracle of Omaha” insists on understanding how a company makes its money and how its business model will result in continued profits for years to come. He has tended to avoid tech stocks because he cannot predict the future of tech beyond a couple of years and his preferred holding period for a stock is forever!
So, if you want to walk in the steps of a master investor go ahead and see what folks like Seeking Alpha are suggesting. Then do your own analysis of a company’s fundamentals. Do not be afraid to throw out most of the investments you look at as “too tough to call.”
How Long Term Is Long Term Investing?
Choosing deep value investments fits in with a long term investment strategy. Your chosen company has been beaten down by the market but is still making plenty of money. Its management seems to understand what they need to do to keep the company moving ahead and are not resorting to tricks like buying back huge blocks of stock to support the share price or artificially inflating their dividend in order to attract unwary investors. How long will it take for this stock to regain share price? How long will it take to replicate Buffett’s experience with Coca Cola? We once asked how many years will it take to make an investment long term. The answer is that it takes at least 5 to 10 years for market fluctuations to average out and reveal the true long term value of an investment. This is the time horizon when choosing deep value investments.
Coca Cola