Is It Time to Start Being Cautious??
So with that in mind, I thought I’d do a quick comment on my thoughts on the state of the markets.
To review, I’m generally a pretty bullish guy. I can remember when I was in college in 2008 and 2009, desperately waiting for my next paycheck to get deposited so that I could put more money in the markets as they were crashing. Unfortunately, at that time I was just started out and buying mainly large cap stocks, so while I made good money in the end, it was not as much as I likely could have made buying small caps.
More recently, in 2011 I put up a post entitled “Don’t Panic!” that argued for buying stocks in the wake of the mini-crash from the U.S. downgrade. And in 2012 I put up a post discussing the IPO craze and how the huge increase in IPOs and, in particular, Oaktree’s IPO could signal markets were starting to get a bit frothy. Despite that, I felt there were plenty of values to be found in stocks.
But now, it’s getting more difficult to find value. Stocks continue to run up, and there’s not much left on my watch list that’s anywhere close to its 52-week low.
Can you still find value? Yes, it’s out there. But I think it’s coming in a different form. Previously, there were companies like JCTCF selling for 5 or 6x earnings. Insiders owned a nice chunk of shares, the balance sheet was strong, and they were buying back shares hand over fist. Everything was aligned very nicely, and it would have taken a doomsday scenario for investors to lose money investing in the company.
Now, I’m finding more value in stocks with a lot of hair on them. These are stocks where it’s almost impossible to argue they’re trading for less than the sum of their parts or asset value, but there’s questions around management intentions. Pay might be too high, or the controlling shareholders might be pretty dismissive of minority shareholders. Reading (RDI) comes to mind, with their related party transactions and high management pay, but there are some others that I’m currently researching with much worse insider transactions and treatment of minority shareholders, and I’ll be sure to post them soon.
Is there good news? Sure. Stocks still look cheap relative to alternatives like bonds or cash, and there’s still plenty of cash on the sideline and fears to overcome (mainly, slow growth and debt fears). Traditionally, big market tops happen when people completely ignore downside risks and pretend there’s nothing that could go wrong in the world, and it’s tough to argue that’s the case today.
Bottom line: There’s value to be found out there, but you need to dig deep. Stay wary, and don’t be scared of selling stocks that are at fair value to raise cash.
Disclosure: Long JCTCF, RDI