Tag Archives: shopping

A Shopping List For Bargain Hunters

The old saying that “things can always get worse” seems to be an apt description for markets so far this year. A poor start to the year has snowballed into an environment in which investors are being paid to “sell the rallies.” Year-to-date global equity markets are down roughly 10 percent in dollar terms, as measured by Bloomberg performance data for the MSCI ACWI Index (NASDAQ: ACWI ). While a few markets, notably Canada and Mexico, are flat to nominally higher, several market segments, including U.S. biotech, China and Italy are down more than 20 percent since the start of the year, according to Bloomberg data for the Nasdaq Biotechnology index and the respective MSCI country indices. Against this backdrop, bargain-hunting investors are asking whether there may be opportunities. My take: Given that the sell-off is occurring in the aftermath of a multi-year bull market, stocks overall still aren’t cheap. That said, it’s not too early to begin compiling a shopping list of potential bargains that may be worth considering . While the selling has returned some value to equities, the best that can be said is that most markets now look reasonable. According to a BlackRock analysis using Bloomberg data, a global benchmark ( ACWI ) is trading at around 16.5x trailing earnings , down around 7.5 percent from last summer’s peak but roughly in-line with the 10-year valuation average. Global stocks look cheaper on a price-to-book ( P/B ) basis, but with the exception of emerging markets equities, they are only trading at a small discount to their 10-year average. If valuation is unlikely to put a floor under markets, there are two other scenarios that could help establish a bottom: signs of economic stabilization or a more aggressive, coordinated response from central banks. As I don’t view either as imminent , markets are likely to remain volatile in the near term. There’s value to be found if you know where to look However, for investors looking to bargain hunt, there are certain segments of the market that are trading at a significant discount. While it may still be too early to pull the purchase trigger, these two segments in particular are worth a closer look. 1. Emerging Markets. After underperforming for the better part of the past five years, emerging market stocks, as measured by the MSCI Emerging Markets Index, are one of the few, genuinely cheap asset classes. At roughly 1.25x trailing book value, emerging market equities are trading at a level last seen at their trough in early 2009. On a relative basis, using the MSCI World Index as a proxy for developed markets, EM stocks trade at nearly a 35 percent discount to developed markets, the largest such discount since the market bottom in 2003, according to an analysis of data accessible via Bloomberg. 2. Energy stocks . The other universally unloved asset class is energy. While assessing ” fair value ” is always an elusive exercise when discussing commodities, the recent plunge in oil prices seems to have created value in energy-related companies . With energy firms’ earnings still plunging, their price-to-earnings ( P/E ) ratios don’t look very appealing. However, based on P/B measurements, the sector, as represented by the S&P 500 GIC Energy Sector, is trading at the lowest level of the past twenty years and at about a 45 percent discount to the broader U.S. equity market. Even assuming future write-downs, the current discount looks large. Emerging markets and energy have another argument in their favor: Over the past several months, rising volatility has begun to chip away at the momentum trade. Long positions in biotech and tech darlings have already been hit. Downside momentum plays continue to work, but being underweight, or short, energy or emerging market stocks have become very crowded trades. Similar to what has happened to long-side momentum plays , such downside momentum trades are likely to violently reverse at some point. When that occurs, these two segments appear well positioned to benefit. This post originally appeared on the BlackRock Blog.

Going Shopping: Chicken Vs. Beef

The headlines haven’t been very rosy over the last week, but when is that ever not the case? Simply put, gloom and doom sells. The Chinese stock market is collapsing; the Yuan is plummeting; there are rising tensions in the Middle East; terrorism is rising to the fore; and commodity prices are falling apart at the seams. This is only a partial snapshot of course, and does not paint a complete or accurate picture. Near record-low interest rates; record corporate profits (outside of energy); record-low oil prices; unprecedented accommodative central bank policies; and attractive valuations are but a few of the positive, countervailing factors that rarely surface through the media outlets. At the end of the day, smart long-term investors understand investing in financial markets is a lot like grocery store shopping. Similarly to stocks and bonds, prices at the supermarket fluctuate daily. Whether you’re comparing beef (bonds) and chicken (stocks) prices in the meat department (stock market), or apple (real estate) and orange (commodities) prices in the produce department (global financial markets), ultimately, shrewd shoppers eventually migrate towards purchasing the best values. Since the onset of the 2008-2009 financial crisis, risk aversion has dominated over value-based prudence as evidenced by investors flocking towards the perceived safety of cash, Treasury bonds, and other fixed income securities that are expensively priced near record high prices. As you can see from the chart below, investors poured $1.2 trillion into bonds and effectively $0 into stocks . Consumers may still be eating lots of steaks (bonds) currently priced at $6.08/lb while chicken (stocks) is at $1.48/lb (see U.S. Department of Labor Data – Nov. 2015), but at some point, risk aversion will abate, and consumers will adjust their preferences towards the bargain product. Some Shoppers Still Buying Chicken While the general public may have missed the massive bull market in stocks, astute corporate executives and investment managers took advantage of the equity bargains in recent years, as seen by stock prices tripling from the March 2009 lows. As corporate profits and margins have marched to record levels, CEOs/CFOs put their money where their mouths are by investing trillions of dollars into share buybacks and mergers & acquisitions transactions. Despite the advance in the multi-year bull market, with the recent sell-off in the market, panic has dominated rational thinking. Once again, the rare occurrence (a few times over the last century) the dividend yield of stocks once again exceeds the yield on Treasury bonds (2.2% S&P 500 vs 2.1% 10-Year Treasury). But if we are once again comparing beef vs. chicken prices (bonds vs stocks), the 6% earnings yield on stocks (i.e., Inverse P/E ratio or E/P) now looks even more compelling relative to the 2% yield on bonds. For example, the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ) is currently yielding a meager 2.3%. For a general overview, Scott Grannis at Calafia Beach Pundit summarizes the grocery store flyer of investment options below: While these yield relationships can and will certainly change under various economic scenarios, there are no concrete signs of an impending recession. The recent employment data of 292,000 new jobs added during December (above the 200,000 estimate) is verification that the economy is not falling off a cliff into recession (see chart below). As I’ve written in the past, the positively-sloped yield curve also bolsters the case for an expansionary economy. Source: Calafia Beach Pundit While it’s true the Chinese economy is slowing, its rate is still growing at multiples of the U.S. economy. As a communist country liberalizes currency and stock market capital controls (i.e., adds/removes circuit breakers), and also attempts to migrate the economy from export-driven growth to consumer-driven expansion, periodic bumps and bruises should surprise nobody. With that said, China’s economy is slowly moving in the right direction and the government will continue to implement policies and programs to stimulate growth (see China Leaders Flag More Stimulus ). As we have recently experienced another China-driven correction in the stock market, and the U.S. economic expansion matures, equity investors must realize volatility is the price of admission for earning higher long-term returns. However, rather than panicking from fear-driven headlines, it’s times like these that should remind you to sharpen your shopping list pencil. You want to prudently allocate your investment dollars when deciding whether now’s the time to buy chicken (6% yield) or beef (2% yield). DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) including AGG, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

FSRPX: Just How Good Are Amazon And Home Depot, Inc.

Summary High expense ratio, but good reference point for diversification. The fund has shown strong growth over the last decade. FSRPX is invested in the retail market. There are several industries that make up the consumer cyclical category. Retail is one of these industries and has seen some changes over the last decade. There’s more to come with new generations wanting convenience in their shopping experience. Malls are an example of retail that is becoming outdated and starting to have vacancy problems. Online retail has been one of the major factors in people not leaving their house to shop. It’s says a lot when you can go to a mall with over one hundred stores and still have to travel to another location to get your grocery shopping done. Retail starting to see some changes brings great potential to any companies who can adapt to the future. The Fidelity® Select Retailing Portfolio (MUTF: FSRPX ) has succeeded in choosing companies that have done will with the changing retail market. FSRPX mostly invests in companies that deal with merchandising finished goods and services primarily to individual customers. Expense Ratio The expense ratio is .81% which I would like to see lower much lower. If I wanted exposure to the retail market based on FSRPX’s performance I would only use it as a reference point for what stocks to invest in. The ratio is quite a bit lower than the category average, but that’s rarely ever a good comparison with how high some funds like to charge. With how well the fund has performed I believe the ratio wouldn’t deter me from investing if I wasn’t able to directly invest in the stocks. High ratios are always a major annoyance in a down market and why I tend to stay away from them. There was a management change in 2014. The fund continues to beat the S&P 500, but it’s hard to tell if that has anything to do with management or just how well Amazon (NASDAQ: AMZN ) has performed. Amazon is 15.7% of the fund’s holdings and has exploded this last year which could explain the continued performance of FSRPX. Diversification Here are the top ten holdings in the company: It’s daunting to see so much equity in not only the top ten holdings, but also 22.1% being in the top 2 companies out of 48. With 67.6% being in ten companies there is a lot of volatility risk. Management has done a good job in choosing stocks that have potential earnings growth compared to the benchmark: MSCI IMI Retailing 25/50. I was also excited to see that many of the holdings have good international potential. International exposure is always a great way for companies to grow when the domestic market is showing some stagnation. With how much equity this fund has in the top two holdings it’s a good idea to see how they are doing. Home Depot, Inc. (NYSE: HD ) has been performing extremely well and especially over the last several years beating the S&P by a large amount. HD is not only in a good retail market, but also has been a solid growing company. Analysts have been bullish on HD which could slow gains down, especially over a short period of time. I’m bullish on HD for a long term investment but wouldn’t expect a lot of growth over a short time horizon unless they exceed analysts’ current bullish forecasts. The housing market is looking steady for the time being, but keep in mind a hit to housing is a direct hit to HD. Amazon has been on a massive run lately and I like to think of it as a cube instead of a bubble. Their actions mimic the Star Trek’s Borg more than it does a bubble about to burst. While their PE ratio may scare many, it excites me that Amazon just floats around assimilating everything. Amazon has done a lot to help retail go in the right direction. Online retail is extremely convenient for customers. Amazon Prime is a great resource for people and those who have it are generally content. AWS, Amazon Web Services, is just another way Amazon has taken something clunky and made it into something flexible and easy to use. The cloud computing services offered by Amazon is not only inexpensive, but also has great scalability. There’s probably a plethora of hoops AMZN will have to jump through, but Amazon Prime Air is another great idea that will move shipping in the right directions for customers. Performance (click to enlarge) The fund has outperformed the S&P and its benchmark. There isn’t as much diversification which causes the potential for more volatility, but there is a track record for investing in companies that have done well over a long period of time. The two most notable years were the fund taking only a -29.58% hit in 2008, but still having the most growth in 2009 with 57.82%. Do note without these two years there isn’t much different than compared to the market. Retail as a whole has done better than the S&P 500 in 2015.