Where have all the good stocks gone?

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/finance/stocks/where-have-all-the-good-stocks-gone-8e8fbb79

Where Have All the Good Stocks Gone?

With prices at records, there are fewer to buy and the quality of remaining ones is surprisingly bad. Blame years of low interest rates.

By Spencer Jakab, The Wall Street Journal, July 8, 2024

Low interest rates are good for stocks. Are they good for the stock market?

That seems like an odd distinction, but it is one that could weigh on American investors’ future returns. There aren’t nearly as many companies to buy, and the ones that remain just aren’t what they used to be…

The explanation is that a long period of low interest rates and the rise of index funds made smaller U.S. companies attractive acquisition opportunities…it was a combination of other companies and private-equity investors using cheap debt that snapped up hundreds of attractive corporations. …

“The ones [smaller companies] that remain have profit margins way below the historical norm.”…

At a time when risk-free Treasury bills yield over 5%, one response could be waiting for stocks to get cheaper. [Sounds good to me. – Wendy]…

Alternatively, a popular index ETF tracking an S&P Dow Jones Indices small-cap index sounds similar to its FTSE Russell counterpart but has beaten it by 300 percentage points over the 24 years both have existed. The difference seems to be that the index provider screens for profitability before adding a stock, so it includes fewer of them. Similarly, a small-cap index maintained by Wilshire recently had a vastly superior average return on equity of 8.63% versus 4.65% for its Russell counterpart. …

An even better strategy to bet on a small-cap renaissance might be to choose value stocks or to venture beyond U.S. borders for small-cap opportunities. Similar to the way the stock-performance pendulum has swung too far in the direction of large companies, value investing has been in the doghouse. … [end quote]

These are contrarian approaches for investors who think that the current bubble in large-cap (especially AI-related) equities is bound to pop…and that small company and value stocks will rise in turn.

Given that so many good, profitable companies have already been sucked up by large companies and private equity using free money, even more due diligence than usual is required for the contrarian strategy.

Wendy

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Ayup. I have more cash than I would prefer, because of a dearth of decent prospects. I dropped RTX because of their use of cheap, powdered metal, in engine parts, which will probably produce recalls and special charges for years. I have dropped some others due to management gutting the financial strength of the company with stock buybacks. Others, because they became “darlings” and bid to absurd levels. Dropped Pfizer for lack of any prospects once the covid vax wave passed. Dropped big oil in May, per plan.

Steve

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Even though I am almost entirely in VOO and QQQ I do worry about this as well and has made me start to look at various ETFs that might address that issue.

  • VFMV - Vanguard minimum volatility
  • SPLV - Invesco low volatility
  • QUAL - iShares quality factor etc
  • Any of the number dividend ETFs, like VYM
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Years ago, I invested in a fund run by “Financial Funds”, now known as Invesco. The fund manager had a stellar reputation, and solid returns over the years. Then the fund manager was discovered to be front running his moves in the fund, with his personal portfolio. That got him tossed for an ethics code violation. I don’t think I made two nickles on that fund, over the span of a few years… I got nervous when I saw how much “restricted” stock, ie no liquid market, the fund held, and finally gave up on it. Running my own portfolio, I make mistakes, but they are my mistakes. I don’t lose money because of crooked fund managers, only crooked CEOs.

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I love my VYM!!

JimA

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More money is lost on waiting than investing… When the market is returning 25% (2023) or 11% so far this year… 5% is suddenly looks very bad.

The profitable companies in R2K have < 12 PE.

Actually the large companies are much safer than small companies. Their balance sheets are strong, their sales, and margins are more resilient in recession. It is not just the tech, I see the same in the banks. Bigger banks have a strong balance sheet.

If you are looking for small cap, value, look at regional banks, many are strong, and sitting with tons of excess liquidity. There are pockets of REIT’s looking interesting.

In international my recent purchases of VGK, INDA have returned 10%+

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Some thoughts

  1. One didn’t need AI to pick Nvidia (NVDA). One just needed to pick NVDA. A small investment in NVDA near the start of the year would have doubled and allowed for several sub-par picks
  2. I’m sure a few broad ideas e.g. QQQ, would have also worked. But not of the market had heated up too quickly.
  3. Find a niche sector, and deep-dive in. While it looks like many shipping names peaked in late May - early June. At least, many of the ones I selected appear to have peaked in that time-frame. But, I still am optimistic as their near term business prospects seem decent, and most pay a decent dividend.
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But you are not explaining ten years from now.

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The CAPE wearing warriors have argued marked is expensive since 2010. The longer the timeframe the argument to stay in the market gets strong.

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It is not a put.

I do not care if the market goes up or down. This discussion misses the point because it is generalizing.

Who says cash would be on the sidelines for an entire ten years? Other than someone like Warren Buffett.

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Up!

30 stocks with a CAGR of 10% or higher for the past 16 years. You can find their charts here:
https://invest.kleinnet.com/bmw1/xref.html

 16 Y   Symbol Company
 CAGR
40.23   CAMT   Camtek Ltd.
34.59   FICO   Fair Isaac Corporation
32.92   SMCI   Super Micro Computer, Inc.
30.58   KLAC   KLA-Tencor Corporation
29.05   LLY    Eli Lilly and Company
27.69   FIX    Comfort Systems USA, Inc.
25.64   TSM    Taiwan Semiconductor Manufac
25.22   UFPT   UFP Technologies, Inc.
24.90   COKE   Coca-Cola Bottling Co. 
22.58   COST   Costco Wholesale Corporation
21.03   EME    EMCOR Group, Inc.
19.71   MSTR   MicroStrategy Incorporated
19.48   PWR    Quanta Services, Inc.
18.01   SPXC   SPX Technologies, Inc.
17.48   STRL   Sterling Construction Co.
17.33   USLM   United States Lime & Minerals
16.95   MOD    Modine Manufacturing Company
16.60   GFF    Griffon Corporation
16.35   IRM    Iron Mountain Incorporated
15.92   HWKN   Hawkins, Inc.
15.37   SCCO   Southern Copper Corporation
14.62   ORCL   Oracle Corporation
13.60   CLH    Clean Harbors, Inc.
13.39   RMBS   Rambus Inc.
12.79   CLS    Celestica Inc.
12.63   TOL    Toll Brothers, Inc.
12.27   ANF    Abercrombie & Fitch Co.
12.23   CRH    CRH plc
11.03   NRG    NRG Energy, Inc.
10.81   POWL   Powell Industries, Inc.

The Captain

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You are arguing the cash is not put, and simultaneously arguing that cash will be deployed… presumably on a sell-off…

Do you even have a point?

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It is called investing. As opposed to gambling because someone else drew up a statistical model for you.

You have no point. The math may add up but you will probably see poor results ten years out.

Most people do not make 10% per year over the longer haul. The statistical model you brought up is misleading. Looking at 2023 does nothing for anyone now. Looking at 2024 does nothing either. You do not have 2025 to 2034 to look at. So what can you do with your model?

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What is called?? Just to be clear… you have not articulated any viewpoint. Hence I asked do you even have a point. All I see is you are attacking me without any data.

The long term results of investing in the market, dollar cost averaging irrespective of market cycle has far superior results is a fact. There is nothing to suggest poor results. If you have data, post it.

Here is my own example of investing in a ETF 14 years ago, and in spite of all the head winds of emerging market it has returned 8.12%…

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That is not a superior result.

Dollar-cost averaging is the practice of investing a consistent dollar amount in the same investment on a regular basis. The dollar-cost averaging method reduces investment risk, but it is less likely to result in outsized returns .

Dollar-Cost Averaging: Pros and Cons.

Dollar-cost averaging (DCA) is an investment strategy that involves regularly investing a set amount of money into an asset over time, regardless of price. This can help investors reduce the impact of market volatility and lower their average cost per share. However, DCA is less likely to result in higher returns than other strategies, such as lump-sum investing.

My comment, I am not discussing my strategy.

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Dollar cost averaging gives you a favorable average cost. Not sure about the return comment. You would do fine dollar cost averaging on Nvidia stock. Even though it goes straight up. Return is about stock performance. Cost can be a minor part of return. But great way to accumulate an etf or mutual fund.

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Paul,

Rarely will someone who is dollar-cost averaging intend to stock pick. Rarer yet will someone stock picking be good at it.

I am discussing retail investing.

Dollar-cost averaging is for retail investors. Let’s not pretend those are superior results.

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Lots of misconceptions…

Successful hedge funds adopt multiple strategies, i.e., they have talents who are specialist in arbitrage, fundamental analysis, currency, interest rate, etc. So you can have un-correlated returns. Pretty common.

Now, someone like me, applies similar approach. I adopt multiple strategies:

  1. Long-term investments based on fundamentals
  • Themes (monopolies, stalwarts)
  • Tech
  • Financials
  • REIT
  • Fixed Income/ Bonds/ Preferred’s
  1. Long-term investments using Index/ ETF (some of this are in 401 (k));

When you don’t have the skills to pick the individual names or no need to select individual names or winners…

  1. Swing trades; market dislocations
  2. Outright speculation; Separate IBKR account with dedicated capital.

Except 4, the other 3 are used on all accounts. When your investment horizon spans multiple decades, and focused on creating generational wealth, you should be very happy with high single digit long-term return, especially one which requires no maintenance at all. For ex: I do regular covered-call targeting just 10%~15% annualized returns; These strategies hurt you on a bull market, but on a down market helps you. Someone dismissing 10% return is not spectacular, hardly manages serious money.

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Yes, of course the problem is you had pick NVDA in the first place.
Nvidia is one of those companies that has seemed great for a while. They keep making big bets some themselves that keep paying off. I was a little spooked by the crypto thing, but AI more than made up for it. Nvidia is very expensive at the moment, but maybe given the way things are going it is actually a good buy?

Costco is another one that has been kicked around the TMF boards for ages as being too expensive “we missed our entry point!” But the company continues to print money like it is going out of style. It is a juggernaut. And the bigger it gets, the more economy of scale it gets, which means it sells stuff cheaper, which means it gets bigger…

At a PE of 50 for retail though? I don’t know what to think about this. Seems like there has to be a better entry point. I’ve been thinking these same thoughts for 15 years and missed every entry point along the way.

As a pure chip play, TMSL might be the way to go. There used to be dozens of companies who could build advanced chips. That eventually got whittled down to three, Samsung, TMSL, and Intel. But it might only be one at this point. TMSL has a huge moat. The capital costs of this business are astronomical. This might be the one True Company to Rule them All.

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  • 2023

According to a BNP Paribas survey, hedge fund portfolios returned 6.67% on average in 2023, which was 1.5% below their target. However, Aurum’s Hedge Fund Data Engine reported that the median performing hedge fund returned 7.2% for the year, and the industry as a whole was up 7.9% on an asset-weighted basis.

As of June 21, 2024, the S&P 500’s one-year return was 22.70%, which is higher than its long-term average of 6.87%. This return does not include dividends. As of December 27, 2023, the S&P 500 was up about 24% for the year, which would be its best year since 2021.

“Common” is a good word for it. No misconceptions. The results are terrible at times. Often. When compared to the markets at times or better stock pickers.

The business return for years was to hope for 10%. You are falling short. You need cash to change that.

Dollar cost averaging as compared to how hedge funds work is not a good working solution.

You are not demonstrating success. Neither are the hedge funds.