Value Stocks No Longer Frozen Carrots 'N' Peas
Looking down on the Macy’s paraders on Thanksgiving morning, I waved frantically at Santa perched high in his reindeer sled. Santa waved back. (Third floor, facing Central Park.) A good omen for 2018, but I don’t own Macy’s stock which bounced back over 50% from its $15 low just months ago.
This is my problem: I haven’t analyzed M as a stock over a decade. Yes, I’ve done work on AT&T and General Motors because the analyst consensus was stubbornly negative. As money managers we missed the turnaround in Wal-Mart, too, which is unforgivable. Costco’s numbers came in way above consensus, as did Boeing, Deere and Caterpillar.
I’ve cut back but still overweighted in NASDAQ 100 Index holdings, including Alibaba, Facebook and Alphabet. This is solely a valuation based call. As far as I can tell, growth rates remain intact. But, I’ve tired of analysts justifying valuation at 30 times 2019’s EBITDA’s multiplier of free cash flow. Let Amazon crow about its operating cash flow growth, but it’s still a skimpy bottom line.
I do crave more stocks yielding over 5%, on a conservative payout ratio – no more than 65% of earnings. These stocks still sell at a big discount to the market, some at 10 times earnings. I added to AT&T, General Motors and Enterprise Products Partners.
Internet paper trades in unison. Let NASDAQ 100 decline 1% and they’d drop 1.5%. Aside from Amazon, still a puzzle, iconic tech houses sell for 30 times forward 12 months’ enterprise value. Variance between GAAP and non-GAAP earnings averages around 20%. Nobody expects this disparity to close anytime soon. It goes unmentioned in analyst music sheets. A current report on Salesforce.com is a perfect example of studiously avoiding discussion on valuation. Otherwise, they’d have nothing to recommend.
There’re dozens of fundamental companies that were too cheap on earnings, dividend paying capacity and primacy in their industry. Add UnitedHealth Group, here now selling at 20 times forward earnings. I’ve just bought more Enterprise Products Partners, a high quality MLP yielding 6.6%. So, move over all you yield starved retirees. This is a growth stock in an environment of $60 oil. Better this one than ExxonMobil, with an indifferent yield. Hedge funds are short AT&T which yields 5.6%.
Nobody can figure out as yet whether GM is a value trap in a toppy setting for domestic auto sales. Management thinks they have a future in driverless technology and electric cars. At least, they’re doing the right thing by investing billions therein.
The market is readily buying into the unfolding scenario of orderly GDP growth approximating 3%. Helping now are rising inventories and our improving trade balance, with the dollar so weak relative to the euro and British pound.
Why doesn’t our FRB stop talking about reducing its bond inventory and do something aggressive like buying back much of the 30-year Treasuries outstanding and issuing new paper presently yielding under 3%, an historic low point? Come on, fellas, time to get courageous.
Euroland still is mired below 2% growth, even less for England. Their interest rates should remain much lower than ours so somebody needs to explain to me why I shouldn’t short the pound and euro against the dollar. So far this is a losing trade. Is now the time to be a contrarian investor? Maybe, yes. Internet stocks now are saying there’s still a valuation issue.
So far, nobody is challenging growth properties, but forget about per share earnings, dividends and book value support, what you get partly in bank stocks. Even banks now trade well above book value and just yield between 2% and 3%. It’s hard to project dividend growth at more than 10% to 15%, annually, paralleling earnings recovery. The case for elevated net interest margins, arresting loan growth and sharp recovery in trading and underwriting is conjectural at best and not around the corner.