Thursday, June 16, 2016

Gracefully Navigating a Frustrating, Go-Nowhere Market

The last 18 months have been a terrible time for market investors. We've seen historic high volatility and, at the same time, virtually zero price appreciation in the S&P 500 or the Dow, which is like getting seasick without even leaving the dock. As a result, many investors are pulling money out of stocks and putting it into Treasury bills (yielding under 2% in most cases), bonds (as much as 4%), and worst of all, spending it.

Don't give up.

Look at what's been happening lately: s Syrian civil war and the resulting refugee crisis threaten to overwhelm western Europe; Brazil is facing crime, corruption, political collapse, and the Zika virus, all set against the coming Summer Olympic games; China's formerly ripping economy, driving much of the world's production of goods, is slowing down; a mass shooting occurs every few months in the US; Great Britain teeters on the verge of exiting the European Union; and a polarizing, confusing, destructive US presidential campaign season is in full swing. The stock market is largely a national thermometer of stability and confidence. Is it any wonder it's in turmoil?

The vast majority of investors feel more comfortable getting out of a market that is stagnant,  erratic or falling. They wait until their own confidence returns— when stocks are clearly rising— and then they reenter the market, only to sell again when things again look bleak. That's the same as selling low and buying high. Then they repeat the cycle.

The appropriate response, of course, is the most logical but also the least comfortable: it is to stand pat. Don't sell your holdings. Wait it out. Because typically, in two years' time, not a single one of the disturbances mentioned above will matter. None will impact your long-term returns.

Soon enough, the market will begin to move again. It might take until after the election in November, or it may be as soon as next week's "Brexit" vote. But it will happen. Consumer spending is relatively strong, in spite everything. That will be reflected in companies' earnings, and that will impact market prices. Given what's been going on, there is a fair amount of pent-up stock price appreciation looking for release. But if you sell, you'll be on the sidelines when the turn comes.

Certainly, not selling doesn't mean you have to do nothing. There are plenty of interesting businesses currently available at great prices. And when things do turn, you'll look brilliant. (I doubled down on LinkedIn late last Friday because it looked underpriced. On Monday news came that Microsoft was buying LinkedIn for a 50% premium over Friday's closing price. I didn't know that would happen, but I'd be lying if I said I didn't love the feeling. And it confirmed my entire investing philosophy.)

With or without market movement, it's a good time to buy

Apple (AAPL): No longer the astonishing growth story it's been for the last 15 years, Apple is still one of the greatest money-makers in the world— yet the stock price reflects only the former. Even if Apple is selling fewer iPhones than it was, the company is massively profitable and will continue to be so. In the next few months they will release the iPhone 7, which holds promise as many buyers of the iPhones 5 and 6 still have not upgraded, potentially waiting for the 7 to arrive. In addition, Apple Music has been revamped, the Apple Watch will be faster and more useful, AppleTV is expanding its reach into the smart home, and on the horizon lies the Apple car, sure to make a dent on an old and stagnating industry.

Facebook (FB): Hard to believe there's anyplace to go with Facebook, but here it is: Facebook is massively profitable, yet it's stock price has yet to catch up to it's rocketing advertising revenues.

Twitter (TWTR): True, user growth is flat at Twitter. But hundreds of millions of loyal Twitter users around the world continue to count on the service for news, sports updates, and celebrity worship. The service has been helpfully evolving its user interface and has recently reinvented its platform for advertisers: it's revenues have never been higher. And whether the company continues to go it alone or gets rolled up by Google/Verizon/Amazon, it's not going anywhere.

General Motors (GM): A leaner, meaner GM is making better automobiles than they have in 50 years. Down to 4 brands (Chevrolet, Buick, Cadillac and GMC Trucks), the company has been on a tear with critics and analysts both. The higher quality, more competitive products have allowed dealers to decrease buyer incentives, which has improved GM's profitability, and the strongest balance sheet in decades hasn't hurt either. The market hasn't recognized the company's achievement yet, but it's coming.

PayPal (PYPL): Recently spun off from eBay, PayPal is rising fast in a newly wild-West payment environment. Scores of companies are now competing to process your spending, from Square to ApplePay to plain old handwritten checks. PayPal recently rolled up Venmo (the millennial's favorite cash-exchange system) and is now a major payment processor, putting real fear into the banks and the credit card companies. Digital payments are here to stay and PayPal is one of the frontrunners.

Under Armour (UA): Under Armour's stock has been beaten down severely from its highs last fall, largely on the departure of two senior executives and a rare earnings miss in Q4. Neither of these is likely to impact the business in the long term. UA has been doing an excellent job growing its core business with exploding sales of basketball shoes and golf clothing (thanks largely to prescient contracts with Steph Curry and Jordan Speith), as well as a fast-growing women's apparel business. Meanwhile the company has invested over $1 billion in connected-fitness technology and "wearables", competing with FitBit and the AppleWatch, among others. And to date, UA is is still the only company with the ability to actually challenge Nike's worldwide sports and fitness dominance.

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