Tuesday, October 7, 2008

Is it time to make the move?

Yesterday was a momentous day in many ways. The market meltdown was global and there were moments during the day when the first 1000 point drop day seemed possible for the Dow. However, there was something about yesterday that seemed different (at least to me) from the market tumult over much of the last 3 weeks:
1. The drop in the market, at least in the US, was caused more by concerns about economic growth than by fear. Put another way, while much the volatility in the markets of the last 3 weeks could be attributed to shifting equity risk premiums, yesterday's drop was caused more by more conventional concerns about an economic recession.
2. The implied equity risk premium in US equities hit 5% for the first time since October 20, 1987. That is a full percentage point higher than the average implied equity risk premium over the last 50 years. We are seeing either a structural break in equity markets or markets are oversold.
I could tell you that my gut feeling tells me that we are close to the bottom, but I frankly don't trust my gut (or anyone else's, for that matter). However, I think that I will be doing some bottom-fishing today, focusing particularly on companies that have the following characteristics:
1. Products/services that are part of everyday consumption and not particularly discretionary. 
2. Low debt ratios (and I will check for lease and rental commitments) and large cash balances.
3. Solid earnings numbers over the last 12 months.
4. Low price earnings ratios (and low EV/ EBIT)
5. Double digit return on capital
6. Medium to large market cap
I am trying to recession proof (1) and pay a reasonable price (4) for a well-run company (3 & 5) that also faces little danger from the credit squeeze (2 & 6). I don't want to put myself in the position of touting individual stocks on this blog but I will be looking globally. You are welcome to join in!


Anonymous said...

Hello Sir,
well you cn definitely look at ICICI Bank (India) esp. wen it's facing round after round of bad news resulting in to loosing, if i cn say so, faith from investors but surely i cn't see big financial losses...atleast nt nw or in near term.
n hey i know that it's tough to value financial companies bt never know

1465 - jan 2008
690 - month ago
485 - now

Anonymous said...

Don't forget about forced liquidation from hedge funds, programmed trading and margin calls. Fundamental analysis and value-investing may dictate the building-of-positions at this point but the market still feels very much like it is caught in a vicious cycle where the people are selling because the market is declining, and the market is declining because people are selling. It didn't help that the European central bankers can't get on the same page and that Bernanke made comments today forecasting a prolonged economic downturn. What good is another rate cut going to do for us now, anyway? Stepping into this market at this point is like picking up coins in front of a moving steamroller - you might make a little bit of money, but you also might get killed over a few cents.

Unknown said...

Would you care to share the names of the some of the stocks you're buying?

karlitos said...

Dear Professor,

I think Tele5 (TL5.MC) in Spain is a very good choice.

1) TV advertisement + big production business (makes shows/TV commercials/movies that it sells to others)
2) very low debt ratios (non-current liabilities of 90m €, and almost all of that are provisions)
3) solid earnings numbers (net profit margin 1H08 35%)
4) very low PER: 5.4, which gives an amazing 21% return with trailing dividends
5) return on equity 07: 314m (net income)/165m (123+42) = 190%!!
6) 1.5b€ market cap


sc said...

Low-beta sectors like domestic brewers and tobacco companies may be good choices. Some of them (BUD, MO) meet your criteria...

St.Patrick's said...
This comment has been removed by the author.