“It was the best of times, it was the worst of times…” ~ Charles Dickens, “A Tale of Two Cities”
I know that isn’t the Dickens novel we should be quoting this time of year, but it wasn’t Christmas when our story began. There I was in a client’s office in Norfolk, VA, in early March of 2022. The regional bank Silicon Valley Bank (SVB) had just gone under, and panic was ensuing in the regional bank market. As I entered my client’s office I was greeted by the recently retired manager of that location. “Hey Chuck, are you buying banks today?” To which I responded, “Why yes I am. Good to see you, by the way.”
Let me digress briefly: Whenever I give examples of specific investments, it is important to understand that this is for educational purposes only and not a suggestion to go out there and buy it yourself. I am going to be specific, but the important part is not the companies whose stocks I mention, but the thought process that goes into the decisions.
Back to the story: That very day while I was in Norfolk, our traders had been given instructions to buy shares of Western Alliance Bank. Like SVB, Western Alliance is a regional bank in the West; Unlike SVB, Western Alliance is well run. Its stock had been thrown out like a baby with the bath water, but this was guilt by association. We knew Western Alliance well as we had owned it before and felt confident in its future. We suspected that once the dust had settled it would actually be a beneficiary of SVB’s demise, while the Wall Street pundit machine assumed that all the deposits at SVB would find homes in one of the big national banks.
As usual, Wall Street did not understand main street. People who choose to bank at a smaller regional bank do so specifically because they do not want to bank at a large national bank. Some deposits might go to the big banks simply out of fear, but most would search out another small regional bank. Western Alliance was one of the best positioned to take advantage of that. We purchased Western Alliance (WAL) when the stock price was down and most thought it would continue to drop; we pulled the trigger on March 22, 2023, at a price of $34.17. We still own it in accounts where we believe it is appropriate, including my own portfolio.
Fast forward to this past summer when Michael Smith, our director of research, brought a new idea to my attention. He really liked a company named AppLovin, a company that helps app developers monetize their apps. We really liked what we saw: it is a good company, well run, and in an industry with lots of potential. The problem? The stock had already risen 118 percent year-to-date to that point. Who in their right minds would buy a stock that had already gone up 118 percent? The answer turned out to be Michael and me. We purchased AppLovin (APP) on September 10, 2024, at a price of $87.15. We still own it in client accounts where we believe it is appropriate.
What do these two completely unrelated stocks have in common? They are high quality companies and their stocks were selling at what we deemed to be an attractive price. It did not matter that one was purchased when its stock price was going down, while the other was purchased when its stock price was going up; The price movement of the past has no bearing on whether the current price is a good value. This is one of the hardest psychological traps for investors to avoid. We are hard-wired to believe that prices that have gone up are expensive while prices that have gone down are a value. In most of our daily lives this is true, but when it comes to investing, price has to be compared to value. In other words, we compare the price of the stock to the value of the company. The stock price can go down and still be more than the company is worth, and it can also go up and still be a bargain.
This dynamic is important to understand because the stock market has gone up significantly in 2024 and there is a lot of talk about it being expensive. In fairness, as a whole it is expensive, but the price of the market is heavily skewed towards a small number of really big companies. Prudent investors make decisions from the bottom-up, judging each individual investment. There are still attractively valued opportunities out there and there is no sign that this bull market is over. The economy is still going strong: The Atlanta Fed’s GDPNow says we are growing at 3.1 percent. That bodes well for company earnings, which is what drives long-term stock prices.
That doesn’t mean we might not be heading for a correction. We have come up quite a bit and it is natural and healthy for the market to take two steps forward and then a step back. We are not traders, so we don’t get worked up about corrections; if anything, corrections provide opportunities. Regardless, to paraphrase Dickens, we are closer to the spring of hope than to the winter of despair.
Merry Christmas and Happy New Year!
Warm regards,
Chuck Osborne, CFA
