My Reflections on this Market

[SaulR80683]

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.

JMO

Saul

[mrbear102]

Buy a can of peaches for 5 cents, sell them for a dime…bear

[mauser96]

I believe Ken Fisher eas the first well publicized proponent of price/sales in earlier books. He since has said it no longer works as a stock picking tool.

Unless you limit yourself to the US , stock corrections do not always go away.Plus there is the time factor - the Japanese stock crash may have gone away but not in the life span of lots of retired investors. I doubt if real estate values in most of Japan will ever recover to pre bubble values. After nearly a year of minimal gains the general US stock market levels are highish but not in a bubble . Bubbles either grow or collapse, they don’t stay the same size for prolonged periods.

My timing indicators are saying that this was likely a mid market correction and not the end of the bull market. But not enough data is available yet to make this anything more than a" likely" , not yet a “very likely” call. Since all recessions are forecast by markets long before economists wise up, that means no recession is probable in the next few months.

Even though SP 500 earnings may be down a bit in 2016 . The one thing true about analyst forecasts both for individual companies and indices is that they tend to be more over optimistic the further out they go time wise.

[foodles]

I agree with your sentiments, Saul, and especially conclusion, don’t get scared out of good companies. I would add, if anything, to possibly buy more, depending on your situation, allocation, risk, etc. It won’t work for all the stocks that have tanked, but ones that it does work for will more than make up for the lagging stocks you have, when things turn more rational (my opinion).

But this comment…

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.

…although true, is part of the angst you hear on this board.

Your board, I think, has grown greatly in participants over the past 6 months or so, so a LOT of the newer folks on here weren’t “in” these stocks at the beginning of the year, they got in the last few months, at higher prices than where the stocks are trading now, after the many meltdowns. So they, unfortunately, don’t have any gains to hang their hat on, just some large sudden losses.

I’m kind of in between, I started reading this board around the beginning of the year, having heard about it when discussing Enphase (ENPH, the SEDG competitor) on another board, and am grateful for finding it! So I got into many of these stocks in the spring, enjoyed some good run ups, but have now fallen back to about the prices I bought a lot of them at.

I think the people that are saying these stocks are risky are saying so because we’ve seen so many just in the last few weeks that have dropped 20%, 30%, or more in a single DAY. It takes some great resolve and faith to stay in, or buy more, when this happens. It can also go the other way, they can have huge increases in a day when things are going the stocks way, so I don’t think they’re more risky, but best described as more volatile.

I think the reason the 1YPEG looks risky now is that these stocks have had such great growth to get the gains they’ve gotten over the past year or more, that the slightest slowing of that growth (and we know it can’t go on forever, it has to slow down sometime), will hurt the stock for a while, until it resets/consolidates at its new level of growth and more rational minds win out and realize that the stock can still increase greatly even at the slightly reduced growth rates.

I’m definitely no expert, actually feel pretty dumb with regards to how much more many others on these boards know about stock analysis and investing, but am more than old enough to have seen this movie before, and am pretty confident that things will definitely turn up again SOMETIME. I’d never try to predict when, or believe anyone else that claims to know when. I’ve seen my portfolio have more than a few down times, it used to make me just turn away and ignore the market (at least I wouldn’t sell out and lock in losses), but I wouldn’t add, either, and lost many opportunities for some great growth during those times. Now, I typically do add when good stocks go on sale. And in the long run, my portfolio has seen higher highs, followed by higher lows, followed by higher highs, etc.

Just wish I had known what I know now, 30 years ago! Never too late, though, right?

Mike

[mnadel]

Saul wrote:

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.

While I agree with Saul’s overall sentiments, and particularly his advice to stay the course, I think part of why this has been a frustrating period is that the overall market has not been in a correction for three months now, since the beginning of August. August was the correction. But since the August 24 lows, the S&P 500 is up 11%. And during the overall three month period, the market is basically flat. Fooldom, however, feels like it is being hammered daily, including the stocks discussed here and the stocks many of us have been invested in. Having been invested in these types of stocks for a decade, I can say that this has been an unusually bad period. AMBA, BOFI, SKX, VRX, BWLD, P, SAM, SCTY, and every BioTech, to name just a few that I own – it’s been a combination of short attacks, earnings surprises, changes in direction, and attacks by politicians. Every day brings another double digit plummet wholly separate from the overall market. It has felt as if this world is conspiring against us.

Of course, the world is not conspiring against us.

But we shouldn’t kid ourselves. Each of these stocks has a different story – and they are mostly not in the nature of a correction. While the market itself always bounces back after a correction, every stock does not. AMBA’s rise was, fairly or not, based on GPRO. Is that coming back like the market has? Not any time soon. BOFI seems to lack the trust of the market. What’s going to be the catalyst for that coming back? SCTY announced a change in their business model that means the stock will no longer be attractive for those seeking 80%-90% revenue growth each year. Those that sold aren’t buying back. SKX, on the other hand, appears to be more of a case of mean reversion, and if the company continues to perform, the stock will also. Likewise, the cratering of the biotechs based on a Tweet by Hillary Clinton and a letter from some House Democrats seems completely irrational and might present buying opportunities – although it is difficult to known when companies that have no earnings are cheap.

I hope there is some truth in the above, despite the apparent lack of an overall point (as I reread it.)

[htownrich]

There are many ways to pick stocks. None that I have seen are fool proof. I am not nearly smart enough to know if we are in a market correction or not. I know in October the Dow was up 8.5% and the S&P was up 8.3%. I know that some of my stocks were down big ie AMBA(GoPro), SKX(earnings miss), BOFI(lawsuit and management), SWKS(China), all for different reasons in my opinion and all low 1YPEG stocks.

1YPEG is a nice factor to look at but I have stocks that have done every bit as well with negative earnings to little earnings this year ie NFLX and AMZN are two.

I also have expensive stocks that have done well this year ie SBUX, GOOG, FB, PCLN and UA. I sometimes prefer to buy best of breed stocks and pay for them.

I personally do not equate SKX to UA other than they both sell shoes. SKX is not best of breed or close to it for me but I own it.UA is best of breed or close to it in my opinion.

I bought AMBA at $15.32 in August 2013 and BOFI at $27.84 in December 2012. I not selling either and both are low 1YPEG stocks with what I will classify as issues. I wish I had been smart enough to sell AMBA at $129 and BOFI at $143.

I guess what my long winded post is trying to point out is that there are many good and different ways to pick stocks. There are many times to sell stocks. None of them are fool proof. Many of the ways will have big winners and losers and a combination of the two(my long term buy and hold of AMBA and BOFI). If it was easy, we would all be multi millionaires. I am grateful for the 1YPEG tool and will continue to use it just not exclusively. I will continue to learn gnashing my teeth along the way but remembering its only money and there are much more important things in life.

Fool On,
Htownrich

[fullofcarp]

I am not nearly smart enough to know if we are in a market correction or not.

Htownrich,

I suggest that you go to yahoo finance and graph ^RUT (to get a view of small cap stocks) for a 3-month time range, then select Comparison and include the Dow, S&P, and Nasdaq indexes (go to
https://finance.yahoo.com/echarts?s=%5ERUT+Interactive#{“range”:“3mo”,“allowChartStacking”:true}
to get started–sorry, but the Fool software cuts that URL in half, so you’ll need to edit the URL to get it to work properly).

On the graph, you’ll see a percentage change graph that drops sharply from Aug 17 down to a low on Aug 25, followed by a partial recovery that lasted a few weeks, then another drop back to nearly the same level as Aug 17 (depending on which index you track), bottoming out on Sept 28 or 29. There has been a fairly decent partial recovery since then for those indexes.

In fact, for 3 of those indexes, the recovery was roughly 100% (back to early August levels). However, for small caps (as represented by ^RUT), it’s still down by 6.20% since July 31.

To the extent that many of Saul’s stocks are small caps, it’s true that we haven’t yet made it all the way back to where we were 3 months ago. So IMHO, it depends on your perspective as to whether or not we’re still in a correction – for large caps, no – for small caps, we’re partially recovered, but not completely.

as always, i am full of carp

[Tamhas]

I suggest that you go to yahoo finance and graph ^RUT (to get a view of small cap stocks) for a 3-month time range, then select Comparison and include the Dow, S&P, and Nasdaq indexes

Or, go to http://stockcharts.com/freecharts/perf.php?$COMPQ,$NYA,$RUT,…
where they have a pre-defined comparison chart for you, which I have adjusted the time period to the start of August. I like StockCharts for this kind of comparison because they adjust for dividends and so one sees real overall performance, not just price change.

[thejusticier]

“Having been invested in these types of stocks for a decade, I can say that this has been an unusually bad period. AMBA, BOFI, SKX, VRX, BWLD, P, SAM, SCTY, and every BioTech, to name just a few that I own – it’s been a combination of short attacks, earnings surprises, changes in direction, and attacks by politicians. Every day brings another double digit plummet wholly separate from the overall market. It has felt as if this world is conspiring against us.”

I’ve also feel that way lately. I didn’t use to feel that way because I never watch the market. Those were the happy days! and I long for them. I am pretty sure when I will return to not looking, they will all perform much better. Some sort of uncertainty principle is at play here!

tj

[XMFFlygal]

Thanks for the complement Saul.