This seems really silly! (to me)

This is really silly. Here are seven companies that make up just over 70% of my portfolio.

LGIH		13.97
SWKS		14.15
SKX    	        16.28
INBK		16.28
SNCR		16.69
AMBA	        17.07
SEDG		17.72

Their average PE is 16.02. The current PE ratio for the S&P 500 is 21.32. That’s 21.32. What’s the growth rate of earnings for the S&P? Perhaps 10%? What is the average trailing growth rate of these seven companies?

		**Trailing Growth**
LGIH		 50%
SWKS		 63%
SKX    	         73%
INBK		118%
SNCR		 29%
AMBA	        136%
SEDG		150% (capped) 

Their average is 88%. Maybe they missed estimates that had them growing at 89%? But do you think they will stay at PE’s of 16 when the S&P is at 21?

What do we anticipate for the next quarter? Here’s my estimate (which I tried to keep conservative) of next quarter’s year-over-year one quarter earnings growth. Some of the companies will undoubtedly miss my estimates but others of the group will undoubtedly beat them (by a lot).

LGIH		76/39 = 95%
SWKS	      162/126 = 29%
SKX    	        26/19 = 37%
INBK		56/32 = 75%
SNCR		62/53 = 17%
AMBA	        90/68 = 32%
SEDG		40/09 = 344%

What will their PE’s be after those earnings, at the current stock prices?

**One quarter future PE's**
LGIH		11.91
SWKS		13.29
SKX    	        15.58
INBK		14.36
SNCR		16.03
AMBA	        15.88
SEDG		13.39

By this estimate, they’ll have an average PE of 14.35 three months from now at current stock prices. The lowest PE will be 11.91. The highest will be 16! Does this seem silly to you? It does to me. Now you may think this will be their actual PE in three months, or you may think the stock prices may advance a teensy tiny bit (ha!) but come to your own conclusions.




I guess the word I was thinking of, but couldn’t come up with, was… “oversold” !

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Because I own many of those same stocks, I hope that your reasoning is correct. However, the counterargument, which I obviously hope to be false, is that there is an implicit assumption that is false, namely that the future of those stocks will be like the (recent) past. The only explanation that I can come up with for the current valuations is that “the market” believes that that is not true for these stocks, but instead, that the upcoming growth rates will be falling dramatically from what you assume.

as always, i am full of carp


PS: And so, for the sake of better understanding the situation (and hopefully reinforcing why we should believe in these stories), can somebody explain why the market seems to have such lower expectations and why it’s wrong?

as always, i am full of carp

… sorry, but it’s been a rough week for me in the market, and I could use a metaphorical hug with some reinforcement … not just helping me with confirmation bias but with an actual complete-enough explanation …

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Oversold is very much what seems to be going on here!

One explanation:

I was a member of the Supernova service a few years back when something similar happened to the set of stocks the team had chosen for the Odyssey portfolio, a seemingly irrational sale of almost all their growth stocks. The consensus at the time was a mutual fund “sector rotation” where seemingly all the mutual fund managers decide to rotate out of their high growth stocks, book the last year of two of gains (for marketing/bonus/safety) reasons and rotate their money elsewhere.

It was scary at the time wondering if the market was “seeing things the rest of us didn’t” but a year later that portfolio was up like 70% (if I remember correctly)

Anyway, the arguments for these stocks seem very sound to me and I have been continuing to add to SWKS, SKX, AMBA, SEDG, INFN, OLED, SCTY these past few weeks.

Anyway, time will tell.



It certainly does look like a cheap time to buy. But of course things that looks cheap could get cheaper as well.

While I generally agree that these stock are underpriced, and I hold some of them myself, there is the possibility that the S&P as a whole is overpriced.

I think a lot of investors are very nervous now about the market and are unwilling to deploy cash or are preferring to invest in the “more stable” blue chip or defensive stocks at the moment. The drops from highs will scare a lot of investors away until they start to rise again.

Also, there is a seasonality component, and it makes a lot of these names that have fallen recently attractive tax loss harvesting candidates for anyone who is currently underwater on their shares, but that will only last through December, and a lot of these smaller cap names to perform better in the early part of the year.

No matter how good or bad the business performs, the stock price is still ruled by supply and demand in the short term. And right now, the buyers and sellers agree they should be here where they look relatively cheap.

The problem is that if the S&P is indeed overvalued and due to temporarily drop further, these stocks will likely drop more as a result. While I don’t necessarily think that will happen, I am open to the possibility, and it should present an excellent buying opportunity if it happens.


Just as a matter of perspective, I hold GE in my portfolio. It’s sort of like a thermometer for me. It has a TTM PE of 58.7 according to Morningstar and a negative yoy earnings growth for this year. The stock is being bought here lately because it is expected to begin turning around next year with an expected growth of 16% (according to Yahoo).

So what looks to be happening is just everyone is dumping any stock that has a growth that is slowing and buying stocks who’s growth is increasing if only by a tiny bit. That’s my take anyway. From what I’ve seen over the last four years of owning GE and MF selections, this won’t last long. The market seems to be spooked for some reason.



I know I did some tax harvesting so I can buy back in mid December and hopefully catch a Santa bounce. I figure the stocks will not do much for the next few weeks and I only have to be out 30 days to avoid the IRS wash reg. I am planning to get back in by mid December.


While I agree and while I’m invested in several of the same companies, here’s the problem in my view. The underlying premise (you even state it in your post) is that these companies are “growth” stories. And it is the perception of many that economic engine of growth is absent.

I was trying to explain this to my wife who is very upset to see so much of our gains evaporate. I mentioned that the US economy has been on life support for several years. the EU is in worse shape and China, the 2nd largest economy is in reverse. Then I had to correct myself, China is not in reverse, far from it. It is growing at 6.5% One can hardly call that reverse, but it is a slowdown from the anticipated 7.5% I did not even venture into the Fed interest rate policy, QE stimulus or any of the more esoteric economic factors. IMHO it all boils down to one thing. The investment community has lost confidence in growth stories because they have lost confidence in economic growth in general.

So, what’s it going to take to turn it around? I’m not sure. Maybe a few more outstanding quarterly reports will be sufficient despite general economic conditions (assuming several of these companies are able to deliver). Maybe it will take greater economic growth in China and elsewhere (I hope not, for a variety of reasons I don’t see this occurring in the near term).

Does it make sense to park your money elsewhere until things turn around? Maybe it would have last July or August just before or at the very beginning of the decline, but now it only ensures a lock-in on the losses and a guessing game as to where to park the money and when to jump back in on the growth stories. I prefer to wait it out.


The one real and substantial threat to the market as I see it would be a crash of the China economy. Not a slowdown, a crash. If you watch the statistics, imports, exports, and all kinds of other economical indicators are tanking for China - yet economic growth is supposed to miraculously stay on 6.5%. I don’t believe that for one minute.

So let’s assume the Chinese economy is in fact slowing down much harder than the officials would have you believe. At one point, reality will come out. They won’t be able to paint it over with more infrastructure investment, as communities have already piled up too much debt that way. They still haven’t resolved the problem with large, unproductive state companies and small, independant companies cut off from lending. I find it difficult to imagine China has found the holy grail of economic policies and will be able to avoid the sort of recession any other economy in the world goes through once in a while. But given what growth rates they are coming from, the crash will be more dramatic than if the US economy goes from +1% to -1%. So we could be in for a major upheaval of the Chinese economy for a couple of years, which given the size of the Chines economy would obviously have severe repercussions for the rest of the world.

Export oriented companies would be harder hit than those focussed on the US market (CASY being the best example I can think of). And you can read about a slowdown in Asian demand already in company reports. I am sure there will be knock-on effect on the rest of the economy, too. Probably later, and hopefully less severe.

I don’t have the impression the market is currently worried about this or pricing it in - whilst at the same time worrying a lot about the timing of a tiny interest rate step which I think will be fairly inconsequential.

What does this mean for stock selection? My reasoning is that even in an economic slowdown, there are certain investments companies cannot afford to put off - like cyber security or IoT or anything mobile. Consumer I would think will be hit hardest if China is the last real growth opportunity. Companies like Skechers on the other hand have a long international runway for growth, so I wouldn’t expect them to be too exposed.

Other than that, the higher the earnings multiple, the more room there is for prices to fall. So the ‘Saul approach’ to investing in companies with reasonable P/Es appears to me the safest and soundest. Although it sure doesn’t feel that way of late!

Anyway, just my 2 cents worth.


The one real and substantial threat to the market as I see it would be a crash of the China economy. Not a slowdown, a crash

I certainly agree that would be bad. Keep in mind China is moving from a export and infrastructure based economy and an American-style consumer based economy and this will be painful for awhile.

Also keep in mind that while the numbers a basically lies, they are also basically unknowns. The central Gov gets their numbers from the lower provinces. There is an incentive structure that encourages them to lie. So the central Gov does not know how good their source numbers are and then we don’t know what they do to goose them after that. True, you must watch the ports and the electricity usage to see what is going on - trust that people that do that.

That said, there is a lot at stake for the gov and they plan to stay successful at any cost. I expect there won’t be a crash.

In regards to some other posts…
Keep in mind there is a divergence going on here - the mega and large cap stocks are diverging from small caps. Many wise old traders will tell you that is a sign of the end of a bull market (though they hedge and say it can take up to 18 months). So people are scared, they want big liquid stocks because they think the music will stop and they won’t be able to bail at a decent price. This lack of risk tolerance can also be seen in the 20%-30% one day post earnings drops we have seen recently.

That too shall pass…but when?


It might be silly, but it still hurts.
I believe in the companies, but it is hard to see the value of my portfolio go down, down, down.
Hanging in there


The one real and substantial threat to the market as I see it would be a crash of the China economy. Not a slowdown, a crash. If you watch the statistics, imports, exports, and all kinds of other economical indicators are tanking for China - yet economic growth is supposed to miraculously stay on 6.5%. I don’t believe that for one minute.

I think it pays to pay more attention to specific company results than to the overall market. Here’s an excerpt from the last SKX conference call:

“Additional third quarter highlights include: An 11.8 percent increase in our domestic wholesale business, with an increase of 6.8 percent in average price per pair; 52.9 percent sales increase in our international wholesale business, which included strong double-digit gains in Europe and triple-digit growth in China and the Middle East…”


“Our joint ventures in Asia grew by 121.9 percent for the quarter, led by an approximately 175 percent increase in China due to growing popularity of the brand, which has led to an increased franchise opportunity.

China is going through a big shift in its economy. It is transitioning from a manufacturing based economy to a consumer spending based economy. This process won’t necessarily be a smooth one. However, if you look at SKX, the future looks very bright for business in China.

Turning to SWKS. China is transitioning from 3G phones to 4G LTE phones. This transition is only about 20% complete. There are 10s of millions of mobile users who have yet to make the switch. Seems like there is plenty of growth in China for SWKS.

SWKS and SKX are two examples. There will be losers and there will be winners. Seems that commodity firms and companies that derive their China revenue from infrastructure buildout will suffer as China shifts toward a consumer based economy.