The stock markets-rearranging the deck chairs on the titanic. How do you get ahead in the stock market? What’s the magic formula?
I have been re-arranging my portfolio. For the longest time I had a bunch of stocks that went nowhere. The longest time was over 5 years. Most of the finance gurus that recommend a lot of these stocks, BCE, Enbridge, WEC Energy flip flop around whenever there is an earnings report. They go form “perform” to “outperform” to “underperform” every quarter. At least it feels that way. It’s totally mind numbing.
I went back to the drawing board and found some interesting stocks until I got to the P/E ratios. When I started to read about the P/E ratios the analysts told me that there is no cause for concern. Don’t worry, be happy.
P/E ratios are, they say, still within historic norms. But Costco, for example, is trading at a P/E ratio of almost forty-eight. What that tells me is that based on current earnings, it’s a 48-year gig to earn the share price. Now I don’t know about you, but that strikes me as a hefty premium for a company that grows its earnings around 20% per year. But then what do I know? And given Costco’s size, is even that growth rate sustainable? With 6 per cent inflation, they are increasing their real earnings by around 14 per cent. Is that worth a P/E of forty-eight? I don’t know.
In The Good Old Days
In the good old days, these lofty P/E ratios were reserved for some pretty highflyers. Now it is the norm. Mastercard is up there with a P/E ratio in nosebleed territory, 39. Wow!
I searched around for some low ratio stocks. Don’t misunderstand me. I don’t believe that the P/E ratio conveys a lot of information about value, it simply provides some insight for comparison purposes. I am paying an enormous amount for growth. I believe, however, that I am paying even more for brand. It’s hard to justify in a world with so much uncertainty. But the market obviously disagrees with me.
A New Indicator (New to Me)
I came across a new indicator (new to me) of the US Government’s management of the liquidity available to the markets: The Treasury General Account. It’s the government’s bank account. Right now, it has around $865 billion in it. Not bad. It’s something worth looking at to see if it’s built up or gets drawn down. I guess it’s an indicator of the Treasury Department’s overall activities.
Here’s the Financial Times commenting on the balance of the account last year. They are relaxed about it. Not sure if they have a clue what it’s about: Don’t stress about the trillion-dollar TGA rebuild. I guess to the boys and girls (am I allowed to say that?) at the FT, a trillion dollars just isn’t money anymore.
You often wonder whether looking at all of these “indicators” you have any actionable insight into where markets or for that matter individual stocks will go.
Another Scary Story
Earlier in the week, I decided to buy a few shares of Fairfax Financial Holdings. I have watched the stock over the years, seeing it outperform over many years with some brief pauses.
A few days later Muddy Waters (the world’s premier going short guys I guess) put out a report detailing why they shorted the stock. As a result, the stock dropped 10% in one day. I bailed, sold the stock. I have little appetite for getting involved with companies that even have a whiff of accounting irregularities. I had this experience with Bre-X Gold Mining and Nortel Networks, and thankfully got out before these became stock market disasters.
There are a few points worth noting here:
- Fairfax has gotten involved in a whole bunch of activities that have little to do with insurance.
- The level of activity in India may offer great returns for the future, but there is a lot of risk to the strategy. It’s something that I am really not comfortable with by any stretch.
- Generally accepted accounting principles leaves a lot of room for the use of “professional judgment”. There is no way of really knowing if the assumptions are aggressive or not since it’s subject to a fair amount of “flexibility”.
- There are many other investment opportunities less subject to this kind of scrutiny out there.
Scary
In my opinion, the real issue for me here is the influence of investors like Muddy Waters to move stock prices in their favor. These guys must have made a lot of money just by issuing their report. Is it the case that every time they issue a report, the stock tanks and they close out their position? How does that work?
I really have no idea how I would protetc myself against this kind of market manipluation. And looking to the auditors is cold comfort. Why? They already rendered their opinion of the financial statements. Unless something really weird is going on, they are unlikely to change their view.
The End of This Discussion
I have rambled on for a while now. Conclusion? With these kinds of issues coming up and everything else that is going on, maybe it’s time to look around and get a little more conservative.
I noticed that Costco is trading at a P/E ratio of almost 50. It’s pretty big outfit. Where will future growth come from? More stores? Nah. More members? Nah. Other countries? Not sure. But it’s getting into uncharted territory. In 2009 (November) the P/E was around 17.