I have a confession to make, I have no clue what to do here as it relates to equities. While this many not be a huge surprise to some of my fans on Twitter (I love all of you, even the haters 🙂 ) I am just glad I don’t make my living having to pick stocks for investment purposes here, because frankly I just don’t see the value proposition at current levels. I have been a bit more constructive as it relates to the year to date rally in stocks, but I can’t get on board with any of the momentum trades that have worked and will likely continue to work if the market closes near the highs of the year.
For instance, consumer staples, normally thought of as a defensive sector under-perform on the way up but act better than most on the way down, are inline with the SPX ytd, where is the value in that when its largest component. PG is trading at 19x fiscal 2014 earnings that are only expected to grow at 6% on a sales increase of only 2%! That ol’ PE ratio is trading very near the 5 year highs, but to some like David Tepper, the amazingly successful and bullish hedge fund manager of Appaloosa Management, suggested on CNBC 2 weeks ago that PE multiples could expand from 15 to the high teens in a quick (to paraphrase). In this scenario, stocks like PG are already there, and without any material change to their fundamentals, how the heck can investors justify paying a low 20s multiple for such a stock?
The one year chart below shows the range that the stock has been in for the better part of 2013, and despite the stock making new all time highs just yesterday, it under-performs the SPX ytd by a few % (defensive right?).
I get it, the company has a huge buyback, a dividend that yields 2.95%, a recent management shakeup at the of behest of activist investors and only 30% revenue exposure to North America. So any lift in global growth should be good for these guys. Well, let’s keep hoping that happens in the 5th year of unprecedented global central bank intervention because if it doesn’t come soon all of these hope trades could really start to suck.
Again, I am just happy I don’t make my living having to pick stocks that represent good values and should appreciate from current levels, because frankly the only ones that I see are the ones that haven’t worked ytd, like CSCO, or EBAY or QCOM, all under-performing their peer groups and the major indices.
Another example of a stock that might have been cheap and under-appreciated back in the spring, BA, ain’t so much anymore when you consider the stock’s 25% gains in just the last 2 months, with the stock up 72% year to date making all time highs on a daily basis. Yeah Yeah I know they have a 20 year Gazillion backlog for Dreamliners, but come on, whats in the stock right here? Trading at 17.4x 2014 earnings that are expected to grow 13% on sales growth of only 9%, seems a bit un-investable at these lofty heights. The 20 Year chart below is beautiful, and congrats to those who own it for your kids college fund, but where the hell you think it is going now??
I hate to be such a buzz-kill and please don’t label me a perma-bear (I currently have more bullish trading positions than bearish ones) but something has to give and soon, maybe from 5 to 10% higher but it ain’t gonna be pretty, which is why we like to pick our spots for portfolio hedges like the ones we introduced yesterday (Name That Trade $SPY – Portfolio Protection).