Talking Stocks

Even though we’re ~33% off the all-time high, could we be in for more downside?Data from the WSJ makes me think so.The current selloff has erased 1.3 years of gains. That’s it. Even though the drop has been violent, we’re back to where we were in December 2018. Update: Since the article came out, the selloff has deepened and wiped three years of gains off the board. We are now back to levels last seen in January 2017.The majority of bear markets have stayed within a two-year range. The two outliers were the bear markets of 1974 and the financial crisis of 2009.If we match the October 1974 bear market, the market would be at the 1,000 level; another 56.50% lower from current levels. Let’s hope that doesn’t happen😬Also worth pointing out…Earnings estimates could be way too high. Nir Kaissar from Bloomberg notes:Analysts expect earnings of $169 a share for the S&P 500 this year, down from $174. That translates into a forward P/E ratio of 14, which is not far from the 2008 financial crisis-era low of 11. But how realistic is that earnings estimate? It’s reasonable to suspect that the economic contraction from the coronavirus might rival the one that followed the dot-com bust in 2001, or even the one around the financial crisis. Earnings declined by 54% and 92%, respectively, from peak to trough during those two episodes. But let’s assume analysts ultimately write down earnings by 30%, which is an average of the two write-downs they were eventually forced to make during the previous two downturns. That would yield earnings of just $122 a share and a forward P/E ratio of 20, which leaves a lot more room for the market to tumble further.  Let’s take the $122 in earnings from above and apply FactSect’s 5, 10, and 20-year average forward P/E ratio and see what handle the S&P 500 would fetch👇The 5-year average is 16.7 x $122 = 2,037. That’s 11.62% lower from the March 20 close of 2,304.93. The 10-year average is 14.9 x $122 = 1,817. That’s 21.13% lower from the March 20 close of 2,304.93.The 20-year average is 15.5 x $122 = 1,891. That’s 17.93% lower from the March 20 close of 2,304.93.Historical averages are just that. Historical. They don’t show what will happen, just a range of possible outcomes.Our advice If you have dry powder, know what you want to invest in, have a long-term time horizon, and the risk tolerance to sit through another 20-30% further drawdown, put your money to work. Don’t wait for the news to get better. Trying to time bottoms based on news and better headlines is a fool’s errand🤨How the Eleven S&P Sectors Have Performed YTDParenthesis () denotes negative.From best to worst YTD performance:Consumer Staples ($XLP) (19.97%)Top three holdings YTD performance: Proctor & Gamble ($PG) (17.5%) Walmart ($WMT) (3.68%) Pepsi ($PEP) (23.44%)Technology ($XLK) (22.09%)Top three holdings YTD performance:Microsoft ($MSFT) (12.67%)Apple ($AAPL) (21.75%)Visa ($V) (21.74%)Healthcare ($XLV) (22.35%)Top three holdings YTD performance:Johnson & Johnson ($JNJ) (17.29%)United Health ($UNH) (29.42%)Merck ($MRK) (20.91%)Communication ($XLC) (25.00%)Top three holdings YTD performance:Facebook ($FB) (27.05%)Alphabet Class A ($GOOGL) (20.25%)Netflix ($NFLX) +2.86%🙌Utilities ($XLU) (26.00%)Top three holdings YTD performance:NextEra Energy ($NEE) (20.40%)Dominion Energy ($D) (17.95%)Duke Energy ($DUK) (24.28%)Real Estate ($XLRE) (29.76%)Top three holdings YTD performance:American Tower ($AMT) (14.98%)Crown Castle ($CCI) (9.20%)Prologis ($PLD) (28.94%)Consumer Disc. ($XLY) (29.99%)Top three holdings YTD performance:Amazon ($AMZN) (0.09%)Home Depot ($HD) (29.86%)McDonald’s ($MCD) (24.39%)Materials ($XLB) (33.77%)Top three holdings YTD performance:Linde plc ($LIN) (28.60%)Air Products and Chemicals ($APD) (19.51%)Ecolab ($ECL) (26.29%)Industrials ($XLI) (36.91%)Top three holdings YTD performance:Honeywell Int. ($HON) (36.10%)Union Pacific ($UNP) (34.44%)3M Company ($MMM) (28.57%)Financials ($XLF) (38.56%)Top three holdings YTD performance:Berkshire Hathaway Class B ($BRK.B) (24.92%)JP Morgan & Co. ($JPM) (39.72%)Bank of America ($BAC) (43.79%)Energy ($XLE) (56.93%)Top three holdings YTD performance:Exxon Mobile ($XOM) (52.41%)Cheveron ($CVX) (50.14%)Kinder Morgan ($KMI) (40.97%)💥Bonus Chart: 3M Company ($MMM)💥3M has fallen 52% since reaching its all-time high of $260 in January 2018. And is now at a make or break moment price wise. The price is close to testing the 200-month moving average (green dotted line).It last closed below that average in February 2009. By April 2009, the stock closed back above the average and rallied 385% during the next nine years.Currently, it would take a 116% rally to reach the previous all-time high of $260. Why has the stock performed so badly?Recent financial performance has been abysmal. And this is before taking into account the damage the coronavirus will inflict on their business. Key financial metrics like revenue growth, gross margin, net income margin, and return on capital are trending in the wrong direction. Down!New CEO Mike Roman is attempting to turn things around through cost-cutting, shrinking their divisions from 5 to 4, and other measures. We’ll see… But as we always say. If you are bullish on their long-term potential, don’t wait for the metrics to start trending up. You will have missed the best chance to buy😉Additional resourcesHow 3M makes money. ✅HIGHLY RECOMMENDED✅Q4 2019 infographic.Profit & Loss statement and key financial metrics.Have a great day,-CalebFeeling generous?Nothing in this article or podcast is investment advice. It’s for information purposes only. Don’t be lazy. Do your own research😉 Get full access to Pure Alpha at sam.substack.com/subscribe

The Pari-Mutuel SystemFrom Poor Charlie’s Almanack, page 195:The model I like — to sort of simplify the notion of what goes on in a market for common stocks — is the pari-mutuel system at the race track.If you stop and think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market. Any damn fool can see that a horse carrying a light weight with a wonderful win rate and good post position is way more likely to win than a horse with a terrible record and extra weight. But if you look at the damn odds, the bad horse pays 100 to 1, and the good horse pays 3 to 2. Then, it’s not so clear which is statistically the best bet using the mathematics of Fermat and Pascal. Amazon ($AMZN) vs. Carnival ($CCL)Since news of the coronavirus hit, Amazon’s stock has fallen ~17% while Carnival’s stock has fallen ~84%.Is Amazon a better business with better growth prospects? Absolutely. Will Amazon be a better investment than Carnival over the next 3-5 years? That’s much tougher to figure out. As dominant as Amazon is, it’s hard to imagine a scenario where their stock doesn’t crush Carnivals. But I’m asking myself, who’s stock is more likely to double over the next five years? Amazon or Carnival? (assuming Carnival doesn’t go bankrupt)Amazon would have to hit ~$2 trillion for a double. Carnival would have to make it back to $24 (currently at $12).On the flip side, which stock is more likely to get cut in half or go to zero. Carnival.Which scenario is more likely? I don’t know. But that’s the point Charlie was making. Once odds are introduced, it’s not always clear what’s the best bet to take. And unlike horse betting, we don’t know, in advance, what the realized upside or downside would be for a stock. We can only guess. Stocks to Watch: FAANG Edition + MicrosoftThe next few issues will feature lots of charts. Why is that? Well, we believe that prices move before the fundamentals become clear. And at this point, nobody knows how the fundamentals will shake out. Charts are a visual representation of the market participant’s actions. Not opinions! We use charts to find:A place to enter long or short positions.A place to exit if we are wrong.And a place to take profits.👉Read why we use technical analysis👈Facebook ($FB)What’s their chart telling us? Their stock has fallen by ~30% after hitting $220 in January of this year.Look for demand at $140. If $140 breaks, look for demand between $120-$126.Apple ($AAPL)What’s their chart telling us? Their stock has fallen by ~25% after tagging $320 in January of this year.Look for demand at $220. If $220 breaks, look for demand at $200.Amazon ($AMZN)What’s their chart telling us?Their stock is holding up well. It bounced near the $1,600 demand level. If $1,600 breaks, look for demand at $1,400.Where we would get concerned: A monthly close below $1,400 would tell us the likelihood of a deeper drawdown has increased. The 50 MMA (month moving average) is around $1,400 (see chart). The stock hasn’t had a monthly close below that average since 2008.Netflix ($NFLX)What’s their chart telling us?Their stock has traded in a $240-$385 range since February 2018. We’re looking to trade the range until one side breaks. Our bias is towards the upside.Google Class A ($GOOGL)What’s their chart telling us?Their stock has fallen by ~30% since tagging $1,500 in March of this year.Look for demand at $1,000.If $1,000 breaks, we’ll have to reevaluate our downside targets. Microsoft ($MSFT)What’s their chart telling us?Their stock has fallen ~25% since bumping $190 in February of this year. Buyers showed up at the $140 demand level.Look for a move to $120 if $140 doesn’t hold the downside on a retest. Thanks for reading, have a great day, and stay safe:)Caleb Get full access to Pure Alpha at sam.substack.com/subscribe