I prefer a sampling of mid-sized companies when considering valuations, since the really large capitalization stocks nowadays can have a disproportionate impact (like big banks in trouble) than they warrant on the averages and market psychology.
The reason for the quote above, is because most of the measures I’m used to using (after 30 years in the industry) agree that indeed the markets are good value (on sale) despite the fact that every comment I see on social network discussions (including my own), and the press takes for granted that stocks must be overvalued in light of all the negative macroeconomic evidence (consensus?). There may be reason to worry that the global economy has some more turbulence to contend with, but there’s every reason to believe there’s enough bearishness priced in to the market to bet on better days ahead.
Even during the crappy summer months, it was possible to be like Wayne Gretzky and make good plays in what seemed to be a losing game.
On June 22nd, I posted the following advice in ‘Are Oil Stocks Cheap Enough Yet?’ :
“In the event that the consensus is wrong – the U.S. and European economies are about to enjoy explosive growth – the integrated energy companies (like Suncor) are the ones to own if you just have to own something in the sector as insurance. A possible drop in valuations should crude prices fall will be offset by the windfall they’ve been raking in at the pumps. As for exploration and upstream companies…..the evidence suggests it may just be too early to back up the truck.”
In Canada, during the 6 month period ended August 31st, Oil & Gas Refining and Marketing companies returned 21.31% while the Energy Index (including all energy companies) LOST -18.16%. Refining did well in recent month in spite of the market malaise, but exploration not so much as predicted.
I received an email from a fellow that described my call back in March (recommending telecom over resources) as “bodacious” – I had to get out my friggin’ dictionary for that one. Here’s a quote from the posting:
“Of course, there’s always Bell, and the cablecos to have a look at. But shouldn’t everyone continue to obsess about metals, golds and energy? My golly yes – everyone “ELSE” should indeed so the few of us can posititon ourselves in ‘future’ winners while they’re cheap.” Cablecos are up 5.9% over the six months to end-of-August and telecommunications services 9.8% versus an ugly performance by the S&P/TSX Composite Index over the same period.
Before I stop gloating, I’m surprised that most investors believe the market has given back everything since the meltdown. Although it still might do that (who really knows for sure? Not me!), since writing A Maverick Investor’s Guidebook during the summer of 2010, the S&P 500 is still UP by 17.8% to yesterday, if by much less than it was in the springtime (+32% to May of 2011) – when I had warned about the impact of Japan and the bubblicious resources space – and a correction came to pass even more aggressively than I’d expected. But as the graph shows, the slope since writing the book (in which I explained why the market was worth buying into during the summer months of 2010 while I was touring America on my Harley) is still positive indicating the U.S. market paid maverick investors a rate of return (+18%). Timing is everything! From July 2010 to May 2011 the Canadian TSX was up 23% and is still up roughly13% as of yesterday – better than a kick in the head!
So what’s next? If the market is undervalued, there are sectors that have held in well and those that are ridiculously cheap. I picked up stocks like Teck, smaller selected resource stocks in both energy (Delphi) and metals (non-gold such as Capstone) as well as a few of the Canadian banks prior to the earnings releases – you’ll recall (in prior postings) that I figured they’d have to be making more money than expected – and I’m still hanging on to them. Cheers and drive safely – I might be on that Harley in your blind spot!