FYI | Oct 17 2018
By Peter Switzer, Switzer Super Report
Why you should see this sell off as another buying opportunity
There is one Dirty Harry question and one sensible question an investor has to ask this week, ahead of an important profit-reporting week in the US. The sensible question is: “Are we looking at a buying opportunity?” and the Dirty Harry question has to be: “Do I feel lucky?”
Well, do ya?
I have no doubt this market slump has created a buying opportunity but luck will be required when it comes to your timing of any purchases, because the market rebound I expect will be a work-in-progress thing driven by a number of hard-to-work-out imponderables. That said, I’m sure we are in another money-making situation but the timing of when we move up again, remains a challenging matter for debate.
One thing for sure is that a lot of companies were clobbered last week and the market overreaction, which has been created by the flood of money that goes in and out of the market because of ETFs, has created great buying opportunities.
A few weeks ago I underlined in this Report what the fund manager Anton Tagliaferro pointed out about the effects of ETFs and computerized trading, which has led to big price reactions when companies make surprise announcements. He noted a company making an unexpected, negative statement could see a big price drop on the day of the revelation but then, not long after, the people who can calculate the true value of a company, seize upon the buying opportunity and the share price rebounds.
Timing your buying is a bit tricky right now because there are lot of moving parts driving this sell off.
The first is the heightened expectation that US interest rates will rise faster and higher than once was tipped because of the better-than-expected economy, following the Trump tax cuts and the bolstered Budget Deficit.
Second, the US-China trade war and all the uncertainty that goes with that. The tech-stock sell off is clearly related to the trade-related difficulties for businesses in this space.
Third, there’s the question about how the Trump and China tariffs are affecting US companies’ profits.
The expectation is that US profits have risen by 19.2% over the September quarter, and if that plays out, then this should help the rebound in stocks I’m expecting. But there is a curve ball that will also have to be hit out of the park, if Wall Street is to get over last week’s sell off. And that incoming missile/ball is: what if significant US companies say their outlooks have been negatively affected by the trade war?
This week’s company reporting could give us a sneak preview of what should unfold. Some part of last week’s sell off on Wall Street has to be linked to apprehension that profits have to be tariff-affected.
Fourth, you have to remember that the Yanks were overdue for a sell off, as the chart below shows. Note the huge kick up for the index that takes up the angle of gains well above 45 degrees, which tends to be a more historically usual rate of change.
The best bit of this chart is that it shows the S&P 500 index is now more in line with the usual angle of gain because of the sell off and that huge outbreak hump has been neutralized.
I’m not saying that “it’s buy time” but if the next two weeks of profit reporting do not
negatively shock the market, value stocks could easily lead the US market higher.
Value over growth
And on that subject, US experts are jumping on the same bandwagon Charlie Aitken and I have been on, and are predicting that growth stocks could give way to value stocks going forward.
Growth stocks have led the way for nearly five years, and some pretty good fund managers have been brought back to earth because of this trend, but they could be in for a rebound in reputation, if value stocks get re-loved.
In July, Julian Beaumont of Bennelong Australian Equity Partners in the AFR looked at the value versus growth story.
“Some value stocks are clearly cheap for a reason, be it industry woes, intense competition, or innovation upending an aged business model,” he wrote. “Notable examples include the big banks, miners and stocks like Telstra, Qantas and Fairfax, all of which trade on low-teen P/E multiples.”
He also noted that “growth stocks offer far less business risk but often trade in quite lofty multiples. Examples include CSL, a2 Milk, software as a service businesses such as WiseTech, and growth stalwarts such as REA Group, which trade on P/E multiples of 30 times or higher.”
In picking a value company, Beaumont makes an important point: “Investing in value requires confidence that the earnings will at least hold up, lest one buys into a value trap.”
I think the banks are a classic value play but what happens post-Royal Commission will determine how good or bad this value play ends up being. The latest sell off, with our market down 7% since the August high, says there are some good value plays out there and even some growth stocks, such as CSL, should be a case in point.
The chart below shows CSL in early September was a $230-stock and now has plummeted to $189. That puts this stellar stock into bear territory, being down 21%! Some of this price slump is linked to Anton’s computer trading and the mass movement in the ETF plays, and while CSL looks like a money-making play right now, we still might need to see some positivity coming out of Wall Street over the next couple of weeks.
But if you want to seize the greatest value, you might need to move early. That’s why I posed the Dirty Harry question: “Do I feel lucky?”
I’m invested for better times for stock prices ahead but when they show up, it’s still anyone’s guess, especially when you’re dealing with the most unusual US President ever!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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