Statues are falling, parts of cities are being taken over, and COVID-19 is reminding us that it is still around. So, are we headed for another large selloff? Not so fast.
It has become a cliché to say the market rally is dislocated from reality, and that valuations are higher than they have ever been. Well, there are certainly instances where this may be true. Some stocks are quite expensive right now, and some businesses are greatly hurt by our current environment. However, to suggest that is a universal position is simply not factual.
AT&T is a business that, if anything, may be helped by the new normal. It is no longer the phone company; AT&T is the internet and cellular company. As people continue to work remotely, the need for AT&T fiber and unlimited cellular data continues to grow. In the meantime, the stock sells at nine times earnings and pays just under 7 percent dividend yield. (This example, as always, is for educational purposes only and not a recommendation to buy. Iron Capital does own AT&T in client portfolios where it is deemed appropriate.)
Another company whose stock we own where appropriate is Cummins, the diesel engine manufacturer; their stock is selling for 12 times earnings. Yet another is Wells Fargo, which is cheaper today than it was in the financial crisis. We also have invested client money in PayPal, whose stock is crazy expensive, but the company is benefiting from this environment and growing rapidly.
I must emphasize these examples are for illustration purposes. The point is not to go load up on these particular companies, but to understand that all stocks are not in the same situation. Airlines are in long-term trouble; internet providers are not. Brick-and-mortar retailers are in trouble; electronic payment systems are not. Technology companies may be expensive; banks are not.
Referring to “the market” is always an over-generalization, but this is especially true right now. Nothing sells like bad news, so that is what the media dishes up all day, every day. That news has to exist; they don’t just make it up (not entirely anyway). There are industries and individuals that are hurting right now.
There is, however, another side to that coin. I recently had a conversation with a gentleman who is in the boat finance business. I naturally assumed things must be tough for him with the state of the world. He informed me that his business is up more than 400 percent from last year. Summer vacations are canceled as are summer camps, so what are people going to do? Evidently, they are buying boats.
We have a newly organized garage. Our son (primarily with some help from his little sister and guidance from Dad) has built us some new shelves and a pegboard wall. These home projects are all the rage in the COVID world. Some friends of ours needed some stone for a home project; the stone company apologized, but the stone they needed was on backorder. Under normal times they can deliver same-day, but they can’t keep inventory in stock now that everyone has time for that project they have been putting off.
The point is: this environment has both winners and losers. The local restaurant may just be getting by on takeout orders and/or socially distant half-filled dining rooms, but the home improvement folks are slammed with business. Summer camps are shuttered, but boat dealers are overwhelmed.
One size does not fit all. I know you’re tired of hearing it, but this is why prudent investing is done from the bottom-up. That is what we do, and times like this illustrate why.
Chuck Osborne, CFA