Time for Value Stocks? Pfffft…
At the start of every calendar year, investment bank strategists love to come out and grace us with their perspectives on how investment trends might change for the year ahead. Will utility stocks do better this year? Can relatively expensive software stocks continue to outperform? What's ahead for oil stocks?
I've been doing this a long time. And every single year, it seems the same two canards come up: This is the year EU stocks do better. This is the year value stocks become attractive...
Like clockwork. Every. Single. Year.
It's like a local baker telling you the two-day old muffins look good — not a fresh idea, just trying to move some inventory and recoup a sunk cost.
Two things: It is never "the year for EU stocks." I got nothing personal against the EU. But, crikey, you can't lump Greek or Italian stocks in there with German or French stocks. The EU is way too much of a clusterf patchwork of economies for such a broad stroke analysis.
And besides, it is an eternal truth that if the EU is doing well, the U.S. is doing better.
When I took over Wealth Advisory, my first order of business was to declare a singular focus on U.S. stocks. Sure, I've dabbled in some foreign stocks. Results have been *ahem* mixed.
I'm not sure I ever put the official kibosh on value stocks — though, I did recommend Ford once. Overall, I think I've mocked value stocks enough that my subscribers get the point.
Hate the Playa, Not the Game
Lemme get one thing straight: I don't hate the beach.
I don't hate the game (investing), either. I do, however, have some strong opinions about certain individuals who consistently offer what can only be called irresponsible advice. At least that's what I'd call it in polite company. But I don't think we have that problem here at Wealth Daily(!). So I'll tell you what I really think...
I think there are some investment bank strategists/fund managers who will use a public setting (like a CNBC interview) to offer up advice/insight/forecasts that they damn well know is, umm, unlikely, like "Buy EU stocks" or "Buy value stocks."
When I first came into the investment biz 22 years ago, I was taught Graham-Dodd style investing. Valuations matter, cheap is good, etc. Now, that method worked for Warren Buffett because his success is mostly built on buying companies outright.
I maintain a respect for valuations, but the simple fact is: If you strictly follow value investing rules, you will miss out on the best opportunities. And it should be pretty clear that Buffett ignored Graham-Dodd when he started buying Apple shares...
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My experience is that value stocks are cheap for a reason. Something is usually missing, and if you buy a value stock with the expectation that the value will eventually be magically unlocked, well, you might be waiting a good while.
Ford is a great example of this value phenomenon. I recommended the stock back in May of 2013 at $15 a share. It was clear to me at the time that new car sales were about to get really cooking. The P/E ratio was around 10.
And it was true: Car sales hit records for the next few years. Ford shares got as high as $17.70 in mid-2014, but that was it. Ford currently trades for ~$9, the P/E is 22 (the forward number is 7, which is a better measure in this case), and the dividend is a whopping 6.75%!
What is the deal here? Nobody likes Ford now, and they haven't liked it in nearly six years.
Why Value Stays Value
I can't tell you exactly why Ford has been a red-headed stepchild for the last decade. Investors can be whimsical, and me and whimsy don't always get along. Still, I have some thoughts...
I recommended selling Ford in May 2016 at around $13.50. Yeah we took a loss. But it seemed clear to me that car sales weren't going to get significantly better. And subprime auto loans were booming at the time, sometimes offering five- and even seven-year terms.
Ford was peaking at right about the time Tesla (NASDAQ: TSLA) started running. The timing also coincides with when divesting from carbon investments started to become a thing (even though Ford will be selling EVs, too).
It was a loss well worth taking. Shares have continued to drop in value. And just today, Bloomberg reported that the CEO of the biggest auto parts maker, Bosch, said:
It could well be that we passed the peak in global automotive production...We are assuming that this low level will remain constant in coming years and do not anticipate any increase before 2025...The industry change will have a significant impact on employment...We need 10 associates to manufacture a diesel injection system, three for a gasoline system, and one for an electric motor.
There is a lot going in that quote. Pretty much none of it is good for Ford or anyone employed in the auto industry.
Now, my reasons for selling Ford were solid and gibe pretty well with how things have played out. I could've easily pounded the table about how the valuation, dividend, and solid management meant that the stock was solid and the market would eventually recognize the value.
But I don't argue with the market. Do I recommend the highflyers like Tesla? Nope. I don't bottom fish for value, either.
I look for the sectors that have solid growth prospects and focus on the stocks that have the best growth prospects in those sectors. Yeah, you might pay more for the leader than the "also-ran"... you also might make more money.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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