I have been in the investment business for 23 years as a broker, analyst, institutional portfolio manager, and now hedge fund manager. I now see more money whipped around on investment themes or concepts than ever before, and this phenomenon concerns me -- because more than ever, I hear investment "stories" that are factually untrue.
Maybe it's the hedge funds, daytrading off of stories and rumors. Everyone loves to hammer us guys. Aren't we the root of all financial evil?
Maybe it's the financial media, hyping insignificant bulletins into major headlines. What was the investment significance in Martha Stewart's release anyway? Yet CNBC devoted hours upon hours of coverage to the story.
Or maybe it's just that the magnitude and velocity of news flow has grown so much that investors need to boil it down to sound bites.
Whatever the reason, sound-bite trading has evolved into a major force in the financial markets. I, for one, do not appreciate it. But instead of lamenting this trend, I try to exploit and profit from the misinformation embedded in many investment themes.
The purpose of this column is not to list and refute common misconceptions in the stock market today, it is to suggest that readers tread cautiously when heeding the advice of stock analysts and market pundits who reduce complex investment decisions to single, simple concepts.
Take the case of the home builders last summer and fall. The common bearish sound bite at the time was to short the sector based on the impending bursting of the housing bubble. How many times did you read this in
The Wall Street Journal
Rather than following this seemingly studious advice, I did some actual research into the housing cycle and factors that affect both housing supply and demand like employment, demographics, interest rates, industry consolidation and home-pricing trends. I concluded that housing demand and pricing would taper off but not collapse, so I purchased the stocks because they were cheap and discounting a major decline in the market. The bear market in real estate has not yet occurred and the stocks have been excellent performers. So much for that short theme.
This example reinforces the idea that thorough fundamental research should be part of every investment decision. Worried about the economy? Do some research before you avoid cheap cyclicals. Think energy prices are heading down? Before you short
, know what oil price is embedded currently in the stock. Think bond prices have to collapse? Understand the supply/demand dynamics for long-term treasuries before you trade the iShares Lehman 20-Year-Plus Treasury Bond Fund
Real wealth creation results from long-term investing, not sound-bite daytrading. And investment requires analysis, patience and conviction. Fundamental research is frequently complex and nuanced. Things are not always what they seem. At times they are, but fundamental events, both good and bad, could be already priced into a stock. Of course, at other times, fundamental conditions will change and so must your investment decisions.
Earning superior investment returns is not easy (unless, of course, you are flipping houses these days). The stock market is a complex beast. Shares represent ownership in a corporation, not ticker symbols in a financial video game. Businesses and industries are dynamic entities operating in a fluid economic and political environment. Investing should be challenging because its subject matter is. Successfully done, however, it is financially rewarding and a ton of fun!
So find a sound investment discipline that works for you and stick to it. I like to purchase undervalued stocks. Others prefer to buy great growth companies. There is more than one way to skin a cat but you always -- and I mean always -- must heed valuations. The easiest way to get skinned yourself is to flail around chasing sound bite after sound bite. If at the bottom of the next recession, you buy an expensive food stock because "you gotta eat," then my investor friend, you deserve to be lunch.
Eating What You Kill
As for some of my current favorite dishes,
St. Paul Travelers
appears quite appealing. This large-cap value stock trades for 8 times profit and yields abut 2.5%. The major integration issues from the merger appear to be behind the company and I expect premium growth to resume in the second half. Ignore the "insurance cycle is peaking" sound bite for this very cheap, high-quality insurance franchise.
, an evolving apparel retailer, has enhanced its fashion content and beefed up its marketing efforts. Comparable same-store growth is accelerating and with the acquisition of Maurice's the company has added another complementary brand to the fold. I expect improving comps and healthy accretion from the deal to drive valuation ratios higher than the current levels of 11 times projected cash earnings.
is a newer name to the portfolio as well. This small-cap company has a leading position in the enterprise application integration software and services business. The enterprise software business seems to be improving after an ugly March quarter and WebMethods has a major product upgrade cycle ahead. With 60% of the stock value in net cash, the software business is priced extremely cheaply at 80% of revenue. If the new product cycle and accelerating growth in licensing revenue does not lead to acceptable profitability, another software management team might give it a try.
Finally, my leading "value concept" stock remains
shares of this microcap have risen solidly since I mentioned them earlier this year. But this development stage biotechnology company has made meaningful progress on its Alzheimer's test. The company has also revealed the existence of a very early stage but promising drug to treat the same disease. The market cap is tiny so be careful. But that's precisely its appeal: a micro-cap price on a potentially large profit stream.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Applie Neurosolutions and Webmethods to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Marcin was long St. Paul's Travelers, Dress Barn, WebMethods and Applied Neurosolutions, although positions may change at any time.
Robert Marcin is the founder and general partner of Defiance Asset Management. Formerly, Marcin was a partner at Miller, Anderson & Sherrerd and a managing director at Morgan Stanley, where he managed the MAS Value fund (currently Morgan Stanley Institutional Value). Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Marcin appreciates your feedback;
to send him an email.