My Reflections on this Market
I hear a lot of teeth gnashing about the market. Guess what? We have been in a market correction for three months now (since the beginning of August). Market corrections happen, but they do go away. They ALWAYS go away. They are not a cause for total panic. Please remember that EVEN the crash and total worldwide economic meltdown ending in Nov 2008 and March 2009, was followed by the rest of 2009 (in which I was up 143% from the bottom and up 111% on the year). This is nowhere near as threatening as the crash of 2008 and 2009! For example, there’s no worldwide economic meltdown, Lehman Bros isn’t going out of business, General Motors isn’t going bankrupt, etc. This is just a correction. As Flygal so aptly said: I did not enjoy this last month, really annoying, but the market can be like that (Momma said there’d be days like this…) the people who get hurt forget their method when it does not work in the short turn. I hope you stick with it.
One or two people have kept saying that our stocks are high PE and therefore risky. That they are small, therefore risky. That low 1YPEG is somehow dangerous, and they equate it with a high PE. Guess what folks? A low 1YPEG, BY DEFINITION, means a low PE, in relation to its rate of growth. That’s what it’s all about. The 1YPEG is defined as the PE divided by the rate of growth, so for the same rate of growth a low PE gives a low 1YPEG, and a high PE gives a high 1YPEG.
Then I hear that you should choose stocks based on their P/S ratio (Price to Sales). Specifically a ratio lower than 1.5. Just think about that! Some businesses have very low margins, like 2%. It’s just inherent in the business (like supermarkets, etc). They need $50 in sales to get one dollar in profit. Other companies, like software companies, can have 20% margins and only need $5 in sales to make one dollar in profit. Besides which, even in the same industry, two companies with the same P/S could have vastly different results. One could be losing money, while another could be very profitable. It’s hard to think of anything more ridiculous than judging your stocks largely on a P/S ratio.
Others have said that the old stalwarts that are low growth but high PE are holding up better. That may be. What do people look for when they are panicked? They look for security and buy big caps. They sell small companies, no matter how good the results. They find something to worry about (earnings were only up 53% instead of 57%), and buy the stock of big companies that have been around for a while and give them warm fuzzy feelings, no matter how mediocre their results (earnings were only up 6%, but everyone knows the name of the company). They sell stocks that have had big rises, whether the rise is merited by the company’s growth or not.
But guess what folks? SKX is still up 69% year-to-date! That’s sixty-nine percent (!), in spite of this ridiculous sell-off. ABMD is up 94% year-to-date. INFN is up 34% year-to-date. Even SWKS is up 5.5% year-to-date. The S&P 500, with all those wonderful big slow-growth companies, is up 1% year-to-date. And those good sales and earnings results that our companies have had, and people have ignored, are still there, even if they have been ignored. Stocks like SKX are selling at ridiculous bargain prices. Don’t get scared out of good stocks that are now at very cheap prices because we are in a market correction.