Investing for the Long Term: Consider Potential Outcomes
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 last week’s post I introduced the key concepts and showed some of our survey results.
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. Thanks to readers who made suggestions after the first version. It is still a work in progress.
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.
Today’s 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. I frequently cite them, and also use their ideas. What am I bringing to the party? I am including some comments about each idea and how I might use it in client portfolios. I also assign a matrix classification. I encourage comments on both and hope that authors will soon include some of the matrix thinking in their work.
Chuck Carnevale analyzes FedEx Corp (FDX) concluding that the post-earnings price jump is justified by the fundamentals. He takes note of the pandemic effects, which “really hurt FedEx’s global trade and commercial business-to-business shipments for both Express and Ground, and additionally weakened the company’s light truckload volumes.” He then describes the positive effects of forced changes, including a jump in ground deliveries to consumers and less competition from commercial jets for the FedEx airlift assets.
[Jeff] As always, I find many things to like in Chuck’s analysis. He provides both a good idea and a lesson about stock valuation. Here is the supporting Fast Graph.
The key to valuation is that the current price is justified.
His viewpoint is supported by the most recent data from the company including post-recession plans. That is what makes this especially attractive. The chart shows the upward earnings path. I place the stock in cell C2 of the matrix.
Stone Fox Capital expects Delta Air Lines (DAL) to improve more rapidly than its “conservative” corporate guidance. The firm cites the 25% increase in air traffic. Its opinion is that quarantine requirements will:
…only reduce travel demand at the margin. Travelers better understand the virus now, making them less likely to cut a week’s vacation to Florida just because of a requirement to quarantine (one that isn’t even really enforceable) when daily deaths are at recovery lows despite surging new cases.
[Jeff] Stone Fox Capital always has great data in support of its conclusions. The most important point here is that Delta has reduced the burn rate to $15 million per day. Despite the cost-cutting I really hate the airlines. I am unmoved by a technical chart that sees the stock returning to the June high of $37, but their forecast is a return to the pre-virus highs of $60.
My two objections? 1) Too much resets on the assumption of a full rebound, something my Great Reset members do not see happening, even in two years. 2) At best, this idea is a “reach.” At worst it could be a disaster. I place the stock in cell A1 of the matrix.
Kirk Spano writes, USO: Oil Prices Will Be Lower Forever. His logic includes the long-term decline in demand, acceleration from the pandemic, and the current huge oil glut. He adds the effect of a reduction in commuting, which consumes 6 mbd.
[Jeff] There is much to like about Kirk’s analysis. His record on oil stocks is excellent. His research combines authoritative data with consideration of alternative scenarios. He also explains the tracking problems faced by USO, an issue that few buyers understand. He notes the potential for bankruptcies (See Barron’s for one of several examples). I place the ETF in cell A1 of the matrix.
Fortune has a list: The best stocks of 2020 so far have made pandemic investors much richer. They have a top ten for the S&P 500 and for the Nasdaq. I own one on each list, each purchased long ago. The article also lists the worst performers.
[Jeff] This type of article does the opposite of what I recommend with the Matrix. Inevitably, people focus on what worked over the last six months. Forget about fundamentals or significant changes in the investment landscape.
How about Peloton? (PTON). Al Root (Barron’s) interviews Prof. Aswath Damodaran on “What Peloton Needs to Do to Keep Thriving.” His original take on the stock:
When it went public, I didn’t like the company. Why? Because of the business model. Forty dollars a month, and it’s a $2,500 treadmill. I remember watching an analyst on CNBC saying, “All my neighbors have Peloton.” And my reaction was, then you need to get out of whatever neighborhood you live in and walk a few blocks.
He continues to describe an alternative, lower-priced subscription that will work with any exercise bike. That is a high-margin mass model “where you forget about the equipment, which is an expensive, low-margin business, and you make it all about subscriptions.”
[Jeff] I am a big fan of Dr. D. This analysis is a great fit with our matrix analysis. The company got great visibility and terrific sales from the pandemic. What will happen on the other side of the recession? How much of the gain can the company maintain? I expect some business slowing, even with an effective change of the business model. I place it in A3 without a business model change and B3 with a successful shift. I see no rush to buy until we have more visibility into the post-recession model.
The Acquirer’s Multiple features an excellent stock screening tool. This week they suggest Cactus Inc. (WHD), one of the cheapest stocks in their universe. Here is their description, backed up with earnings, cash flow, their proprietary score, and much more.
Cactus Inc is primarily engaged in the designing, manufacturing, and sale of wellheads and pressure control equipment. Its principal products include Cactus SafeDrill wellhead systems, frac stacks, zipper manifolds, and production trees. The company also provides mission-critical field services, including service crews to assist with the installation, maintenance, and safe handling of the wellhead and pressure control equipment, as well as repair services for equipment that it sells or rents.
[Jeff] This idea is a perfect illustration of how the investor must go beyond screening techniques, no matter how good they are. This company sells to businesses in the A1 group, and that is where it belongs.
Watch Out For
Movie theater stocks. There are several specific challenges, writes Steven Zeitchik (Washington Post).
“You don’t want to make all the health stuff too obvious,” said Johnson, the chief executive of Classic Cinemas, which operates 120 screens at 15 theaters. “Because if it feels like they’re checking in for a flight, they aren’t going to come. But you have to let them know somehow. So it’s really hard.” Movie theaters are encountering a slew of challenges as they lurch toward reopening after a three-month shutdown, including well-documented obstacles such as a lack of new movies and capacity legally capped as low as 25 percent. 0
Bankruptcies. Fortune has a table of the largest ones this year. Many of these would have been surprises just a few months ago. Consider the sectors and how they fit the matrix.
My mission is to encourage both investors and professional stock pickers to look beyond the recession. Do not just rely upon current data.
Thinking about the matrix should be the most important step in your analysis. You will soon discover that there is no reason to reach for marginal choices.