Six reasons to buy stocks now
Posted
Jun 15 2009, 09:08 AM
by
Minyanville
Rating:
Just as I suspected, through much of the last two quarters, investors were missing the biggest drivers of this market. It's happening again, but this time for different reasons. More on this later.
During the fourth quarter of 2008 and the first quarter of this year, the focus was on the supposed second-worst recession of all time, which “justified” multi-year lows. I asserted that incredibly flawed rules (see my podcasts on key rules, policy fixes, and so on) were the primary causes, as they had been for all of 2008, and were exacerbated following the collapse of Bear Stearns. Is it too early to declare this case closed? Maybe. But let’s look at just two key facts:
1. By almost every statistical measure, we're in either the seventh- or eighth-worst recession. So this is nowhere even close to the second-worst recession of all time -- and won't be. Yet stocks put in the second-worst showing, and actually printed the worst rolling 10-year showing for large-company stocks as tracked by Ibbotson. This should at least make people question why.
2. Look at market advance since FASB relaxed FAS 157. This corresponds nearly to the day this news was first announced. The low may have preceded this by a few days, but there was also well-telegraphed talk that this would be fixed ahead of time. Basically, once the market knew FAS 157 was being neutered, the lows were locked. As I said many times, once we quit artificially destroying bank capital, we'll see all manner of positive benefits -- both real and perceived.
The point here is, if you weren't charting, if you believed the doom-and-gloom rhetoric, and weren't focusing on the facts above (or at least acutely aware of them), most likely this incredibly great rally eluded you.
Why do I bring this up? Because I believe people are doing this again, and missing enormously important drivers in the market -- again.
1. This incessant argument about a bull rally in a bear market versus a new bull market is idiotic. Are market participants going to refuse to buy stocks again until we're “officially” in a bull market? If you do that, you're buying SPX at prices that won’t net you much, if any, in the way of gains.
2. The intense focus on the market in general is problematic;specifically, the idea that we must have a pullback, and shouldn't buy anything until we see one. Again, this seems sound unless the stocks you're watching to buy on a pullback don’t pull back as much as the market. Or they pull back so quickly that you don’t reverse hard before they can be purchased.
3. The rise in interest rates will kill the rally. Frankly, this is the worst one yet, though it seems to be the most debated recently. I'll talk about this in another piece, but this rise in yields may be the most bullish thing I’ve seen this year except for the FASB relaxation effectively overturning FAS 157.
4. Lastly, according to many metrics, true growth stocks have likely never been cheaper. I use PEGs and normalized EPS most frequently, but PSRs and price to book, or net cash would tell the same story. This is further compounded if you back net cash out of the PEGs or normalize EPS numbers. This is because net cash has exploded while EPS has stayed positive, and cash burns have been low to non-existent.
My point here is that I think people are now looking for the holy grail to tell them where the market is heading next: economic numbers, next-quarter earnings, or another major change in sentiment. I think all these factors will become clear quite soon, but in the meantime, stocks are starting to, once again, reflect some modicum of fundamental pricing attributes. Moreover, I think truly powerful fundamental stories and drivers will really began to propel stocks (both higher and lower).
Over most of the last year, you have had to watch the market and basically ignore stock fundamentals, as even the best were pounded into oblivion by overwhelming market pressure. Now -- even though market pressure is still dictating the bulk of directional stock movement -- fundamental stories are starting to stick.
Look at Visa (V), Bank of America (BAC), JPMorgan (JPM), Apple (AAPL), and Baidu (BIDU). Fundamentals are starting to overwhelm market direction. More than once, this occurred in a single day.
Another noteworthy example is First Solar (FSLR). The solars have been ripping, and this stock is stuck, since I believe people are coming around to my view that silicon will swamp thin-film technology. I’ll still let the chart dictate what I do on First Solar, but I think this is a key tell for market differentiation. Additionally, First Solar is in a war between industry-leading, prior EPS results and a future with more questions emerging. I fully believe I’m early on its demise, but will monitor it closely.
Now, it’s still largely a market where differentiation is lacking and investors are focusing on major market dynamics, trading ETFs, and greatly ignoring stock fundamentals. The market is still stuck in beta-tacking mode to a large degree. Futures have an undue influence on daily price swings as we're still navigating through a no-uptick world.
All that being said, I'm seeing emerging signs that some stories are sticking. Occasionally, fundamentals are being borne out. And broadly speaking, stock-specific fundamentals are being reflected in relative alpha -- especially on a risk-adjusted basis. And again, true growth stocks have probably never been cheaper.
So give me your Apples, your Googles (GOOG), and your Visas. Give me your poor huddled masses of beaten-down growth bargains. I’ll focus on these names all day long with the metrics laid out above -- while turning down the noise that everyone else seems to want to turn up.
Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor Sean Udall.
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