We want to thank all who attended our webinar on our 2024 Stock Market Outlook and wanted to offer a follow-up for questions during the Q&A session we were unable to get to in the allotted time.
Question: After the recent pullback of alternative energy stocks, are you considering any of them for inclusion in the value universe of the TPS?
Answer: We haven’t yet found an alternative energy stock in the Value camp that scores sufficiently well in our quantitative valuation framework and has suitable qualitative characteristics. However, we recently recommended Chevron (CVX), which we think is a name that strikes a healthy balance between generating strong oil-sourced cash flow today and using capital to invest in renewable energy sources of the future.
We might also note that lithium producer Albemarle (ALB) arguably is an alternative energy stock, given that lithium is used in electric vehicle (EV) batteries, while French integrated energy giant TotalEnergies (TTE) is a self-described global leader in the production and marketing of oil and biofuels, natural gas and green gases, and renewables and electricity.
Question: What lesson are we to learn from experiences with stocks that have not worked out?
Answer: We utilize a multi-level approach to generate investment ideas and maintain our portfolios. The first level is the quantitative framework, which analyzes more than 3,000 stocks each day. The framework ensures that we are “fishing in the Value pond” and acts as a governor to ensure we are consistent in our investment process.
Subsequently, we perform an initial qualitative review to ensure accuracy of the scoring system and rule out purchase candidates that do not fit the target profile for the intended portfolio(s). With a short-list in hand, we perform a thorough qualitative review of the company’s business, including difficult-to-quantify characteristics like business trends, customer profiles and growth potential.
The same process that has returned some terrific portfolio recommendations occasionally turns out a falling knife or buggy-whip maker, but our winners have long won more than our losers have lost, so our conviction lies in our Value-based methodology versus one or two favored names. In addition, as every stock is fighting for a position, we are constantly reviewing our positioning for changes to improve the portfolio.
Question: Bristol-Myers Squibb (BMY) versus Johnson & Johnson (JNJ). Which do you like best right now?
Answer: We like all our children equally and have maintained a preference for equal-weighted (based on initial purchase) portfolios since The Prudent Speculator began in March 1977. It strikes us as odd when managers label their conviction as Low or High for companies they hold. We prefer a broadly diversified portfolio of stocks and believe the interaction between the securities matters, meaning that a JNJ vs. BMY discussion would also have to include a thorough review of the other companies in a portfolio. That said, JNJ has outperformed BMY of late, which if we could not have both stocks, might lead us to favor the latter.
Question: What about the idea of a “hard landing”… a big drop in just about everything due to lack of liquidity?
Answer: Stocks pull back frequently. Since 1925, 5% drops have happened approximately 3 times per year, on average, for the S&P 500, while Bear Markets (20%+ drops) have happened once every three years or so, on average. We believe each shock–foreseen or not–brings opportunity to buy undervalued stocks and improve our portfolios. Of course, there’s a body of evidence that shows investors miss more waiting for impending doom than they would have if they had stayed fully invested through whatever tumult happens. For that reason, we remind often that time in the market beats market timing (and is less stressful!).
In short, the only problem with market timing is getting the timing right and history shows that losses on Value stocks during recessions have been relatively modest, on average, while returns in the ensuing 12 months have been sensational, on average, so much so that the full recession and post-recession time span has seen above average returns.
Question: When looking at the valuation of a stock which is generally more important, the price to sales ratio or the price to book ratio? And does this vary by industry? Sometimes I’ll see a stock with one number quite high and the other low.
Answer: We utilize a wide variety of quantitative metrics to evaluate our universe. There are situations where metrics do not make sense, such as a P/E ratio in Real Estate. Therefore, the valuation algorithm makes adjustments to substitute P/FFO (funds from operations) for that section of the universe. We present a broad variety of metrics in our recommended lists and in our writing, reflective of our view that there is not a single ‘golden’ metric.
We are also constantly reviewing metrics to determine if new ones might be more indicative of future performance, but we continue to believe that both Price to Book Value and Price to Sales are still well-worth considering as part of the basket of ratios we evaluate.
Question: Within Value stocks – do you prefer small, mid or large cap?
The answer is Yes! The Prudent Speculator’s portfolios have benefited from being market cap-agnostic over the last 46+ years, although we do offer a Small-Mid Dividend Income strategy to our managed account clients, which specifically targets a corner of the market we think is underappreciated and has diversification benefits.
Question: With the commercial real estate market still having headwinds, do you see the TPS real estate stocks in the list having a hard time in the near future?
We think there are both headwinds and tailwinds in Real Estate, but banks are presently well-reserved for problem loans and many of the stock prices have already been punished for sins that have yet to be committed. And, despite the jump in mortgage rates, homebuilder MDC Holdings (MDC) has been a stellar performer. We are careful about the exposures we wish to maintain in our broadly diversified portfolios. In terms of REITs, we prefer individual names rather than broad ETFs in the space that require a rising tide that lifts all boats.
Question: Great analysis and advice. Like the Value focus but interested to see many of the picks do not have strong Value Line timeliness ranks. Could you please address? Thanks.
Al Frank long utilized Value Line, but from the moment I arrived, he always advocated buying stocks ranked 4 and 5 on timeliness. That was because this was generally where the bargains resided. Not wanting to overly simplify Value Line’s approach, but the way a stock becomes highly-ranked for timeliness is that it has appreciated in price with the emphasis on the word has. As a buyer of long-term values, we would much rather pick up stocks that have yet to have their day in the sun, which we think makes it far easier to buy low and sell high.
Question: What has been your most successful and least successful stock and what happened with the least successful one?
While compliance rules discourage cherry-picking, I like to tell the story of a panel I was on at the San Francisco MoneyShow in the summer of 2001. I was asked to name two of my favorite stocks for the attendees.
The first stock I chose was InVision Technologies (INVN), which was a maker of explosive detection systems then trading for around $3 and having a single-digit P/E as well as a strong balance sheet. At the time, they had a small customer list, led by Israel.
The second stock I chose was Read-Rite (RDRT), a maker of disk drive components, which was also trading for a reasonable multiple of earnings and operating in an area (data storage) that we thought had robust long-term growth prospects. Read-Rite was then trading around $28.
As fate would have it, a few months later, the terrorist attacks on 9/11 occurred and governments around the world raced to buy explosive detection machines for airports, which led to a massive increase in the price of InVision. A short while later, the stock was bought out at $50 per share.
Read-Rite saw its stock price move from twenty-eight to thirty. The problem was that the twenty-eight was in dollars and the thirty was in cents, as a cyclical downturn and competitive factors led to the company’s demise.
Our valuation methodology and qualitative review led us to both stocks so were thrilled to have each as the overall portfolio benefited mightily. Had we been forced to choose just one, it very easily could have been Read-Rite…which we not-so-affectionately named Read-Wrong.
Question: Has Tsakos Energy Navigation (TNP) returned on your watchlist?
Answer: We had a challenging time during our ownership of Tsakos, which began in 2004 and ended in 2021. Over that time period, TNP’s management could not seem to operate smoothly. We wrote in our July 2021 Sales Alert, “We had become increasingly frustrated with the lack of progress made in taking advantage of more favorable operating environments. Further, a reverse-share split last year has turned out to be ill-conceived, while questions remain about the sustainability of the dividend. So, despite a very inexpensive valuation on several metrics, we gradually lost confidence in management.” In addition, the ownership structure was convoluted and complicated, and it became increasingly difficult to envision an environment where TNP shares would sufficiently reward shareholders for the risk they were undertaking by owning the company.
At present, TNP’s score is neither Value nor Growth. Even if the quantitative framework showed that TNP passed our initial screens, it would be removed from contention during our qualitative review.