Is the Bull Market Over?
“Widespread fear is your friend as an investor because it serves up bargain purchases"
- Warren Buffett
The Portfolio
The portfolio is down over -11% YTD.
Our benchmark index, the S&P 500 is down over -21% YTD.
If you're interested in the stock market, are looking for diversification or growth please feel free to connect me. I'm always available to talk, maybe provide some new ideas or to present to your group. clay@claybaker.com
What I'm doing today
The last several days have been devastating for everyone investing in stocks. While most investors are selling off their holdings I'm going to take a different approach. First, I don't feel a need to panic and just sell to avoid going to zero. Our overall strategy is still sound, but some of my tactics may need to change, so I'll be spending some time looking at every company in the portfolio again to see where we have the greatest value going forward. When I'm done, I may sell some holdings to raise cash and I may add to existing holdings or start new positions. The good news is that we're not down nearly as much as the overall market. Had we just invested in an S&P 500 index fund we'd be down twice as much. Before I do any work on the portfolio I plan to turn off the news, take a break from the markets and then sit down and pragmatically go through every holding with a new view of the future.
"Nobody every made a dime panicking"
What's Happening
I thought that a downturn would be caused by valuations not a pandemic or an economic collapse. Here's what I know at a macro level. The death rate of CV is 3.6%, but that number will come down to about 1% when the final numbers come in. At 1% CV is 10X more deadly than the seasonal flu. Dr Anthony Fauci and Dr Scott Gottlieb agree with that assessment. Personally I’ve been through the energy crisis of the 1970’s, the crash of 1987 (this feels similar), the DOT COM bubble crash, the financial crisis and several pandemics. We always recovered because the financial system, while fragile is highly resilient. This time around we aren’t having a financial crisis, the economy is strong; we’re having a health crisis, and outside of companies like www.everbridge.com , few modeled for this. We will see a significant decline in earnings which will require me to rework my year end target for the S&P 500.
I'm not anxiously waiting on Congress to create a solution on the fly. Ultimately this crisis will require a package the size of TARP or greater. The travel industry alone will likely cause a 5% hit to global GDP. Congress should have understood that and been prepared to act, but our Congress only seems willing to act once a crisis happens, not before. I expect to eventually see bills to eliminate payroll taxes, eliminate student loan debt, pay cash to unemployed, cover medical tests for CV, guarantee small business loans, defer or eliminate interest on loans and credit cards temporarily. There will be significant consolidation in shale oil companies, 8-10 will likely go bankrupt, specifically those with the largest amount of debt. This is going to strain the banks that made those loans, but bank reserves are in the best condition possible to deal with the eventual defaults.
So, what’s working? THIS IS NOT POLITICAL COMMENTARY! I DO NOT APPROVE OF WHAT CHINA DID. I'M COMMENTING ON THE RESULTS.
China introduced barbaric policies to contain the virus and it's starting to work.
South Korea did massive testing, right away; and its working.
Italy locked down the whole country; we’ll see if that works.
The United States has done none of those things; we’re still having the same old political arguments and positioning.
We need a response from the Fed and Treasury with a back stop for liquidity in the markets. The Fed has already stepped up liquidity by increasing and prolonging Repo-Operations. That’s the first step. Loan guarantees will need to come eventually.
From a healthcare perspective we need to stop waiting on the current test and thinking that will be the answer. I spend a significant amount of my time reading drug trial results and evaluating biotech companies for investment. I can say with some certainty that the current test is too expensive, takes too long to get answers and can’t be deployed in scale. We have an even larger problem with sepsis in the U.S with about 270,000 people dying each year from infections they mostly get in a hospital. A test is available that gives answers in hours, but we continue to use a test that takes day or weeks to get results.
For Coronavirus (COVID-19) we need a test that delivers answers in 1-hour or less, that can be scaled quickly. Hong Kong is closest to delivering that solution. Distancing works best. The vigilance of keeping hands clean is important, not just to prevent acquiring the virus, but also from transmitting it. If you’re a carrier, you don’t know it for up to 14 days. Do everything you can at home and at work to keep everything sanitized and keep distance from others. Based on past pandemics that the months of March and April will be the worst. By May the curve of cases and deaths should turn down. This is the only data source anyone should use:
https://www.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6 Following the anticipated decline I would hope to see the virus dissipate in June, July and August, assuming that people continue protective practices.
From a portfolio position I think that waiting for clarity will be a mistake. Investors with cash should be buying in tranches at lower prices. I believe that there is great value in the best quality companies that have low debt and fortress balance sheets. Some of those are already in the portfolio, some other examples include but are not limited to (JP Morgan, Johnson & Johnson, Nvidia, United Technologies and Raytheon, Intel, Apple, Adobe, etc). Companies with a lot of debt, particularly high interest credit facilities are too risky until we have clarity on their debt. That’s most of the small cap biotech space. We are focused on companies in sectors with massive market potential who already have a head start in their growth areas. MasterCard, Paypal, Disney, Enphase, NextEra Energy, Twillio, Raytheon, Home Depot, CVS, Microsoft, Amazon and more. In the more speculative space I like Tesla, Amarin, Redhill, Docusign, and Mercado Libre.
Don’t fight the tape. Investors are going to take prices lower than you think they can go. I would use limit orders at very low prices to buy small chunks of the companies you like. Let's say you want to own $10,000 in a company's stock. Buying at lower prices in 10% tranches would be a responsible way to add or take a new position.
"Markets don't go to zero, Portfolio's do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
Stay Invested,
Clay Baker
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Keep Me Honest 2019
S&P 500 declines to 2,350 or more (1-3-2019)
Healthcare and Biotech sectors outperform (1-3-2019)
S&P reaches 3,000 by year end (1-11-2019)
CSCO reaches $60/share (1-18-2019)
VEEV reaches $145/share (2-14-2019) (achieved $145.23 on 5-10-2019)
CVS reaches $91.50 (2-27-2019)
Bull market takes another leg up (4-7-2019)
The Fed will lower rates 1-2 times (5-13-2019)
Clay's Rules
Rule #1: Don't lose money
Rule #3: Portfolios go to zero, markets don't, Stay Invested
Rule #4: When a good stock you own drops 10% below your cost basis, add shares
Rule #5: Bull markets aren't sustained without the Transports
Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase
Rule #7: When an investment bank sells below book value, buy it
Rule #8: Tips are for waiters. Do your own homework.
Rule #9: Don't sell a stock because you're bored with it. Do your own homework.
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:
HD, AMRN, BSTC, CVS, CSCO, VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD, HD, AWR, XLNX, MRVL, NBRV, ENPH
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
