— To expand the theme, “Buy stocks of profitable companies that make ‘things’ and return profit to shareholders.” (Jim Cramer)
— In the face of speculation about a 50 basis point move on rates at the May FOMC meeting (followed by another 75 bips in June) the market is telling us we should not buy anything.
— The last time the Fed bumped rates by 75 bips was 1994 and we all know what happened then, or do we?
— Where are we in this secular bull Market?
Buy Profitable Companies
No question this is sound advice, even coming from Mr. Cramer. I do question why he is emphasizing this now, over a year after the bloom came off the ‘tech and innovation’ rose –i.e. ‘The old narrative’… buy innovation at any price. Since that time my proxy for the ‘tech/innovation’ trade, Ark Innovation ETF (ARKK), has lost 67% of its value. My perspective is that many of the companies in that portfolio are profitable and may deserve a second look plus many smaller, well-run companies outside of the tech/innovation space that have be trashed on a perception risk that does not exist. Meanwhile, Cramer is advising names like: JNJ and PG (both very near their all-time highs), Tesla (which he admitted broke his rules) and, finally, Disney (new 52-week low today) and Morgan Stanley (both of these calls actually made sense). My problem with the majority of his call was that he was advising investors to buy high and avoid low. These opinions were rendered without a shred of perspective for the average investor. It was all about ‘what’s working now’. Remember this is the same guy who advised “Oil is a permanent short” back in September of 2021. (You may need CNBC pro to view videos).
Speaking of oil and profitable companies
APA Corporation (nee, Apache Corp) (caveat emptor-I own the name) closed on September 9, 2021 (the date of Mr. Cramer’s unfortunate pronouncement) at $18.69. The stock hit a recovery high of $45.22 on Thursday before closing the week after Friday’s bloodbath at $41.71. According to CNBC’s survey of analysts’ estimates the company could earn over $9/share in 2022. Investment opinion aggregator, Seeking Alpha, is using a consensus number of $9.02. Ergo, the stock is trading at about 4.5 X earnings. At what was the current 3 year strip price (it was $78 at the time of their last investor presentation in March) the company “expect(ed) to generate–$6.5 billion of free cash flow in 2022-2024 … Returning a minimum of 60% of free cash flow to shareholders through share repurchases and ordinary dividends.” BTW, that estimated $6.5 billion would be generated on a total equity market capitalization company of $15 billion.
Where did Cramer go wrong? These company managements are not stupid. They obviously see the same threats that Cramer has seen posed by a world yearning to go green. They have reacted by changing their behavior. They no longer rush to ‘drill baby drill’ when prices move up. They use the cash flow that higher prices generate to invest away from hydrocarbon to alternative energy (or even other industries), pay down debt and reward shareholders to keep their interest. If it turns out that the greening of the world comes more slowly or at greater cost than investors were anticipating when oil prices went minus $40/barrel in the Spring of 2020, the upside potential for these companies is tremendous. In terms of world oil production the same fundamentals hold true. Sovereign oil producers need to diversify away from black gold. As such, they will not be aggressive in bringing on new production and will divert new cash to other non-hydrocarbon projects.
Friday 4/22/22–interest rate/Fed fear front and center!
The markets were trashed Friday (4/22/22) on speculation that the Fed might be more aggressive at its May meeting and bump the Fed funds rate 50 basis points instead of 25. There was even talk circulating about a 75 basis point move at the June meeting. “Markets are cranking up their expectations for Fed interest rate hikes.(CNBC Pro)
The article pointed out (as though this would be a huge negative), without any perspective, that the last time that the Fed took a 3/4 point jump in the Fed fund’s rate was in 1994. To add some color the S&P 500 was at 500 year-end 1994. It would triple in the next 6 years. When it did hit 1550 in March of 2000 the 10-year US Treasury yield was just over 6%.
Where are we in this secular bull market?
The 1982 -2000 secular bull, which included our last 75 basis point bump in the Fed funds rate was spectacular. Our current iteration, which emerged with the final S&P breakout of its YTK 1550 all-time high, began in 2013. Although the S&P 500 has tripled from that level, there has never been the state Df euphoria that existed in 2000 in the current bull bull market. Back then everybody loved stocks. You’d see man or woman-on-the-street interviews where the questions posed would be something like this: ‘Does the high level of the stock market worry you?’ The universal answer would look like this: ‘No way, I’m in it for the long-term. Where else can you get (8%,9%,10%) on your money?’ Yes, there have been pockets (the tech/innovation bubble, the meme stocks) but most people, in my opinion, investors and the media have remained cautious to down right cautious and bearish all the way up … arguing against the market’s success.
In this context I like to refer to the investment wisdom of the late Sir John Templeton, who said: “ Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. …” Templeton’s comment is an observation based on the history of market booms and busts. It’s all about human nature.
With the S&P 500 only about 8.5% from its all-time high you would think investor sentiment would be at least neutral but it is not. Last week the American Association of Individual Investors (AAII) sentiment survey showed improvement hit a record low bullish reading of 15.8%. Although this week’s reading of sentiment showed improvement (18.9% bullish) it was still very low versus the average (38%). Also, the survey’s negative bias has been in place for months. This is in the face of record employment, near-record low unemployment, corporate and consumer balance sheets in good shape, healthy cap-ex plans and continued GDP growth. All this leads me to believe that we are not even close to Sir John’s ‘optimism’ phase yet, let alone euphoria (everybody wanting in on the stock market action).
The new narrative vs. the old … Opinion without perspective is worthless!
Regardless of the narrative in any endeavor, anyone hanging on the opinion of others given without the benefit of context is making a big mistake. In the current market fear has taken its toll on hundreds of company stocks, not because they were unprofitable or did not take care of their shareholders but because they were smaller, considered too risky in an environment where rates are going up (from emergency low levels) and inflation (a big plus for pricing) is raising its ugly head.
Why all the fear? Why the bearishness? Because in the media over-loaded world we live in there will always be a so-called trusted sources (possibly aligned with your own economical-political leanings) who will give you an opinion not based on any historical perspective but on what they think they know, opinion usually based on the dominant narrative if the day. Since bad news sells that opinion will likely skew negative. Don’t let these pundits cost you as this market traces its way to optimism and then euphoria.
Keep calm and carry on. The secular bull is alive and well.
What’s your take?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.