Every month, The Prudent Speculator produces a newsletter that includes a market summary, helpful charts and graphs, recent equity market news, economic outlook and specific stock investment strategies focused on value stock investing. In this month’s Newsletter, we offer perspective on the equity market headwinds that always seem to be blowing, while our Graphic Detail takes a look at Q1 Earnings Season. Finally, we detail stocks we are adding next week to our four newsletter portfolios. We also include a preview of our current Recommended Stock List and Portfolio Builder section with ten highlighted stocks. Note that the entire list is available to our community of loyal subscribers only.
Editor’s Note: Debt Ceiling, Q1 Earnings Scorecard, GDP Growth and more Economic News
“How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn’t make it a leg.” — Abraham Lincoln
We were warned that the partisan stalemate in Washington would make it difficult to pass legislation to raise the debt ceiling, even with Treasury Secretary Janet Yellen warning that the so-called “X-Date” when Uncle Sam would default on its obligations was fast approaching. A few days later House Speaker Kevin McCarthy and President Joe Biden announced an agreement in principle on a two-year government budget in exchange for lifting the debt ceiling through January 2025.
We were then told that the legislation, dubbed the “Fiscal Responsibility Act” might not even make it out of the House Rules Committee, given Mr. McCarthy’s difficult path to the Speaker’s gavel. However, when Congress reconvened after the Memorial Day holiday, the measure moved along with the full house voting Aye: 314 to No: 117 on May 31. The Senate followed on June 1 with another nail-biter of a vote, 63 to 36, and Mr. Biden stated he would quickly sign the bill into law, thus avoiding a catastrophic default.
Obviously, there are never any assurances when it comes to D.C. politics and the nation’s $31.4 trillion of debt is nothing to cheer about. However, it would seem that we need an entire salt shaker rather than just a grain of salt to navigate the headlines these days and stay focused on the long-term prospects of our broadly diversified portfolios of what we believe to be undervalued stocks.
Not surprisingly, we think comments from Warren Buffett are helpful. In 1987, the Oracle of Omaha wrote, “Following Ben’s teachings, Charlie and I let our marketable equities tell us by their operating results – not by their daily, or even yearly, price quotations – whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: ‘In the short run, the market is a voting machine but in the long run it is a weighing machine.’ The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.”
To be sure, while Q1 corporate profit reports on the whole were healthy, the intrinsic value of more than a few stocks has not necessarily increased so far in 2023, including many of those in Mr. Buffett’s portfolio. In fact, the legendary value investor conceded at the Berkshire Hathaway Annual Meeting last month that the businesses his conglomerate owns likely will see lower year-over-year earnings as economic growth will not be robust.
Of course, that does not cause him much consternation, as in the years ahead profits will most certainly grow as the long-term trend for the economy is expansion. Indeed, while folks are lamenting that growth was “only” 1.3% year-over-year in Q1 on a real basis, U.S. GDP actually rose 7.1% on a nominal basis to a record $26.5 trillion.
The odds of a recession in the U.S. over the next 12 months, as tabulated by Bloomberg, remain at 65%, even as the current projection from the Atlanta Fed for real Q2 GDP growth stands at 2.0%, so we realize that stock prices are likely to be volatile as we move through the summer. After all, many market participants are short-term oriented and analyst upgrades/downgrades and social media posts are playing a much larger role in daily stock-price gyrations. Nothing wrong with that, in our view, as Mr. Buffett proclaimed, “What gives you [the value investor] opportunities is other people doing dumb things!”
Patience is paramount, but we have steady hands and a very long-term time horizon, while we like the inexpensive valuations and solid income (12 times NTM earnings and 3.1% yield for TPS) on our portfolios. Noting that Value Stocks and Dividend Payers historically have enjoyed the best long-term returns, we find added comfort in the Robert Louis Stevenson quote, “Don’t judge each day by the harvest you reap but by the seeds that you plant.”
Graphic Detail: Q1 Earnings Scorecard
Economic statistics in the period were subdued, but real (inflation-adjusted) U.S. GDP growth came in at 1.3% in Q1, supporting solid revenue and net income numbers from Corporate America, even as management teams engaged in their usual tempering of guidance. Impressively, the number of S&P 500 companies that exceeded bottom-line forecasts was 78.0%, well above the usual “beat” rate, while 67.5% eclipsed top-line projections. Of The Prudent Speculator’s 98 stocks presented in our Earnings Scorecard, 72% topped EPS expectations, even as the average one-day price reaction was a loss of 0.2%, though there were a few sizable advances.
Standard & Poor’s projects (as of 5.31.23) that after dipping from $208.21 in 2021 to $196.95 in 2022 (last year’s figure includes a massive $66.9 billion ($4.74 per share) “unrealized investment” loss from Berkshire Hathaway in Q2), bottom-up operating EPS for the S&P 500 will rise to $218.70 in 2023, with $244.70 the early guess for 2024. Estimates are subject to change (current forecasts are a bit lower than those three months ago) and many believe a recession is imminent, but anything close to the ‘23 and ‘24 tallies should support much higher stock prices.
Recommended Stock List
In this space, we list all of the stocks we own across our multi-cap-value managed account strategies and in our four newsletter portfolios. See the last page for pertinent information on our flagship TPS strategy, which has been in existence since the launch of The Prudent Speculator in March 1977.
Readers are likely aware that TPS has long been monitored by The Hulbert Financial Digest (“Hulbert”). As industry watchdog Mark Hulbert states, “Hulbert was founded in 1980 with the goal of tracking investment advisory newsletters. Ever since it has been the premiere source of objective and independent performance ratings for the industry.” For info on the newsletters tracked by Hulbert, visit: http://hulbertratings.com/since-inception/.
Keeping in mind that all stocks are rated as “Buys” until such time as we issue an official Sales Alert, we believe that all of the companies in the tables on these pages trade for significant discounts to our determination of long-term fair value and/or offer favorable risk/reward profiles. Note that, while we always seek substantial capital gains, we require lower appreciation potential for stocks that we deem to have more stable earnings streams, more diversified businesses and stronger balance sheets. The natural corollary is that riskier companies must offer far greater upside to warrant a recommendation. Further, as total return is how performance is ultimately judged, we explicitly factor dividend payments into our analytical work.
While we always like to state that we like all of our children equally, meaning that we would be fine in purchasing any of the 100+ stocks, we remind subscribers that we very much advocate broad portfolio diversification with TPS Portfolio holding more than eighty of these companies. Of course, we respect that some folks may prefer a more concentrated portfolio, however our minimum comfort level in terms of number of overall holdings in a broadly diversified portfolio is at least thirty!
TPS rankings and performance are derived from hypothetical transactions “entered” by Hulbert based on recommendations provided within TPS, and according to Hulbert’s own procedures, irrespective of specific prices shown within TPS, where applicable. Such performance does not reflect the actual experience of any TPS subscriber. Hulbert applies a hypothetical commission to all “transactions” based on an average rate that is charged by the largest discount brokers in the U.S., and which rate is solely determined by Hulbert. Hulbert’s performance calculations do not incorporate the effects of taxes, fees, or other expenses. TPS pays an annual fee to be monitored and ranked by Hulbert. With respect to “since inception” performance, Hulbert has compared TPS to 19 other newsletters across 62 strategies (as of the date of this publication). Past performance is not an indication of future results. For additional information about Hulbert’s methodology, visit: http://hulbertratings.com/methodology/.
Each month in this column, we highlight 10 stocks with which readers might populate their portfolios: Elevance Health (ELV), Foot Locker (FL), Truist Financial (TFC) and seven others.