Investing for the Long Run: The Challenge of a Bifurcated Market
I have separated my long-running Investor section from Weighing the Week Ahead. My hope is to highlight ideas for the long-term investor. In my last investment post I applied the key concepts of the matrix to a range of investment ideas. We have been on target so far with what to avoid, and I expect the approach to guide us to the best long-term investments.
For now, and for as long as the pandemic weighs on the market, that is the necessary context for each stock idea. To provide a starting point, I created The Great Reset Matrix. The Matrix is a conceptual guide, which I use in evaluating every new stock idea. The current version draws upon results from the Great Reset Project, where readers have joined in to help with my Wisdom of Crowds approach. The results may seem like common sense. Good! Comments from industry experts and analysts are often quite different. This is one way we will find edge. You can see past research or become a part of the project by signing up for a free membership. I will continue to disseminate results in post like this one, and you can help.
The current matrix version looks at sectors, not individual stocks. Many sectors are not yet listed. You may disagree with the placement of others. If so, the matrix is doing its job – encouraging us to think about what is most important.
This Week’s Ideas
Each idea I include comes from a respected source that I have often cited in the past. In each case I offer a comment about how I might use the stock in client portfolios. I also assign a matrix classification. Comments are most welcome. Please join me in a discussion of the classification as well as contributing other ideas. I hope that authors will soon include some of the matrix thinking in their work.
Dividend Sensei includes an exhaustive analysis of current market factors as the foundation for a stock screen. The screening process includes many logical and important factors as well as underlying data. Here is an example of his analysis of the current, bifurcated market.
The entire post is worthy of your analysis, but for our present purposes I need to skip to the conclusion:
Finally from this list of safe potential investments I select all the companies with yields of 5% or higher, which in this low rate/low yielding world is my definition of ultra-high-yield.
|EPD has a good history, but all things oil rest upon a solid rebound. Energy is cheap for a reason. I put this stock and the rest of the sector in cell A1.|
ENB – see EPD. A1.
MO has solid dividend prospects unrelated to the Great Reset. The bigger question is the attractiveness of these products and the non-tobacco substitutes. Meanwhile, the ability to capture dividends from addiction continues. B2.
PRU has solid financials and a safe dividend. The stock has suffered from low interest rates, limiting the ability to profit from premiums on deposit. I rate it as B2 and see it as a good candidate for call sales.
ABBV also meets the blue-chip credentials. It is fine for the dividend (another B2 entry) but also a good candidate for selling calls.
New Tricks for an Old Dog
Microsoft (MSFT) may reach a new audience if it can acquire TikTok. Harvard Law School distinguished fellow Vivek Wadhwa sees a payoff far beyond the numbers.
|This is an interesting choice which does not fit well in the Matrix. The argument provides support for continuing growth. To me, this stock could be part of a long-term core growth holding if you accept the high valuation. This is the kind of move that might justify it. I place it in group B2.|
Stone Fox Capital analyzes Teladoc Health (TDOC) and finds elevated risk. Their bullish thesis was widely shared, sending the stock soaring despite revenue declines.
|15 times 2001 revenue is much too rich for me. This is a good idea but has become a member of our A3 group.|
Ian Bezek lays out the case for Eastman Chemical (EMN). It is a case of “a real value stock working for the right reasons.” He notes:
Eastman Chemical isn’t a retail company, REIT, restaurant, or other structurally challenged business. Overall, chemicals is a slightly growing industry that tends to track overall GDP.
Eastman has a lot of proprietary intellectual property and earns the lion’s share of its revenue from specialty chemicals. So, there’s a defensible moat there. I’m not going to argue it’s a high-quality business that deserves to trade at a huge multiple. But Eastman has consistently grown earnings, is in an okay industry and has an investment-grade balance sheet. 8x earnings made no sense.
|This is a great argument for a company that is just taking care of business. The upside is reasonable, and the downside limited. It is a acceptable place to wait for something more exciting. Another example of a B2 company.|
Peter F. Way uses his interesting analysis of market-maker actions to identify GenMark Diagnostics (GNMK). The company is benefiting from COVID-19 demands and its proprietary technologies.
|How much has been realized, and how much is left? I would use this only in my aggressive program and place it in cell A3.|
The Dividend Portfolio
Many people, myself included, look forward to the Rose updates on her value and dividend portfolio. I admire the criteria used and the transparency in her reporting. If you take the time to consider her list, you will definitely get some ideas.
|Here is a small challenge: Please look at the Matrix and classify at least some of the holdings. An approximation is fine. My first glance has me wondering about BA, FB, AVGO and some BDCs. Are these all good post-recession candidates?|
Watch Out For
Election “experts.” (e.g. this commodity writer. Or this one). The election is the big story, so everyone with a keyboard wants to offer an opinion. I see this every time. Investors develop an opinion (usually exaggerated and unjustified) about who will win. They next list every idea they have seen from that candidate and assume it will become law. The election outcome is unclear. The resulting policies are extremely unclear even in the sometimes-cited “Democratic sweep.” Most of the fundamental landscape and problems will not change. Major policy moves will not come easily.
The initial market reaction is likely to be completely wrong. Look back to the election expectations for our last two presidents.
I see the current market as a challenge for the long-term investor. I do not expect stocks that are currently leaders to be the best of breed a year from now. It is a real challenge to think ahead, but this is a case where foresight will be rewarded.