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There’s Always Some Good Investments for You Buy. The Question is Would You Do It.

There are two sets of investing questions that are the most commonly asked around at times like this:

  1. What do you think about the market? Should we stay invested? Should we add more? Should we sell?
  2. What do you think of _______? Should I switch over/invest in it?

If you work in providing some sort of advise, you should try and have a handle over how to answer these two questions because I think these are evergreen questions you will get.

Especially when times are not too bad.

I find myself asking question one always when I was an individual stock investor because there seem to be a season for buying and a season for not buying. This mindset tend to permeate to many investors even if they are buy and holding a portfolio of stocks through a unit trust or exchange traded funds (ETF).

The strategy to invest is to work hard and earn more, optimize their expenses and invest the difference. Whenever you have the money, contribute to your portfolio. The investors understand this initially but will ask this question one fine day. They have problems adding on when the market hits an all-time high.

Part of the problem is that if you don’t have an idea how your financial plan work together with your investments, and understand the nuts and bolts of investing less well, you will ask question one pretty often.

There is a fear of missing out on potentially strong long-term returns for those who asked question two. I think this feels like a contrast to the first question. We get these two questions from different groups of people at the same time often enough!

I think I want to take some time to tackle the first question.

The market may seem expensive to you and you find it hard to invest more but there will always be something to buy. And right now there are things to buy which is what I will expand upon today (and probably a few other blog posts along the way.)

What do Buy and Hold Investors Think About Now?

I think that the fear of seemingly frothy markets are the reason why many struggle to add on to their portfolios and would rather wait for a correction. They may be right that a correction would eventually come, but the question is whether that will take place in days, months or a couple of years. They might also be less aware that if a market is trending up, it is a series of new high, then correction, new high, then correction, then new high, then correction.

If markets work this way, what is so worrying about new highs?

If they are not worry about seemingly frothy markets, they will pivot to worry about valuation of the market.

If we compare current market valuation to history, the US large-cap valuation using forward price-earnings ratio is approaching the peak of December 2021. Shouldn’t we be worry about the market valuation?

If not frothy price, frothy valuation, there is a looming recession that is suppose to come last year in 2023 but didn’t come.

Most would prefer to wait for the recession to be over to start investing their additional money. But what if the market has just priced in a mild recession in last year’s choppy market and THAT is the main bulk of the correction?

Beneath the Surfaces of a Market Cap Weighted Index, Things Don’t Looks so Frothy

I have no clear answers to the string of questions.

The questions that some of our adviser’s clients have, I know them as well. I can explain them but I don’t have crystal ball to all the answers.

There are a few possibilities, but perhaps I will use the iShares Core S&P Mid-Cap ETF (IJH) to illustrate:

US Mid Cap ETF – Click to view larger chart.

I use this as a break from either talking about small caps or large caps. The IJH is an ETF with pretty long operating history going back to 2001 if you are interested to do some real performance data study. The average mid-cap companies is 17 billion in market cap, the biggest is 48 billion and the smallest is about 2 billion.

If you are worry that the market is “running ahead of itself”, you might not know that the internals have stalled out for a while.

Some investors still prioritize value or have a valuation layer when deciding whether to add more money.

If you wish to buy quality companies, that are not too expensive, you might want to look beneath the surface. The valuation of the US mid-cap trades at 17 times forward PE, which is similar to the MSCI World, cheaper than the US large-cap.

This forward price-earnings is closer to the historical average for the US Mid-Caps.

If you are would only add when there is a correction, the “correction” is here in the smaller segments of the market.

You have no excuse not to add.

Well perhaps there is still the recession. The smaller companies tend to fare the worse.

Two things can happen:

A mild recession and a 8-10% dip before a recovery. The mid-caps will seem like they didn’t go anywhere for 4 years.

A dip but a slow recovery. The mid-caps will seem like they didn’t go anywhere for 5-6 years.

Most of us struggled with our investments not going anywhere. We question whether we are making the right decisions.

Yet if you have a valuation layer in deciding whether to invest, wouldn’t now be a better time to buy? When things are struggling?

The history of returns shows you that markets do tend to recover but not all individual companies do.

Your fear may be whether the companies you own will recover and thrive. If you are afraid of that, then don’t invest in individual companies but invest in a group of them. Let the aggregate earnings per share, revenue per share recover and not worry if the individual company is going to implode.

We would often stress that some securities are more suited if you have a longer investment time horizon.

Would it go nowhere for 4 years or 6 years? History tells us both are possible or even longer.

If you are an investor with a long enough time horizon, does waiting 4 or 7 years matter? Would you be happy that there is a 3-4 year window where prices go nowhere for you to accumulate if the direction is eventually up?

I think that what most struggle with is a combination of:

  1. Lack of knowledge about the history of returns. This affects how they look at the pessimistic, standard and optimistic returns that are possible, how long bull markets can last, how long or deep bear markets can be. There is also a lack of understanding about the history of returns in various markets.
  2. Lack of a financial plan. Don’t put investments together with the goal they are trying to achieve, and don’t know how long of a time horizon they have. And so there is a fear of every crashes.
  3. When things hits all-time high, they think it cannot go any higher.
  4. When things go down, they think it might not recover.
  5. Have a very narrow view of what is ideally investable for them. Because of that, they are always fixated on a few investments and if it is too expensive, they faced a dilemma.

The solution to the first four is more personalized investor education and planning.

The last one is to show people that there are alternatives. We do not need to fixate on what we have invested in.

There Are Always Investing Ideas to Look At.

Idea generation is a phase or step in individual stock investing that is define as how investing ideas come about. Your friend brings up that a business was so difficult to do without.

The news tells you that this stock has fallen to a 52-week low.

If you are deep in the weeds like a full-time fund manager, you will have a lot of ideas but limited capital probably.

If you are a passive index investor, with less knowledge than what you invest in because there is no need for anything else other than an S&P 500 or an MSCI World index, you would struggle more.

Even today, there are ideas and I am going to give you some examples.

These are not stock tips, and bar one, I am not invested in them. There are reasons why they are trading at where they were rather than all-time highs:

  1. Their revenue and earnings per share guidance points to challenges.
  2. They have problems that some deem difficult to fix.
  3. Investors are neglecting them.

S&P 500 Equal-Weighted

S&P 500 Equal-weight ETF – Click to view larger chart.

Aside from the mega-caps, most of the S&P 500, represented by the equal-weighted index has not gone anywhere for a while. This looks like a similar situation as the US Mid-cap index.

If you would like a large-cap portfolio to play on a broadening out theme, then this index may be suitable.

S&P 600

US Small Cap ETF – Click to view larger chart.

This chart looks worse than the US Mid-Cap index and its non-other than the US Small Caps. The index have struggled for almost 3.5 years and many have given up hope on it but the group of companies trade at the lowest valuation spread versus historical.

If you like US companies, but don’t like lofty valuation, and have a value philosophy, then you might like this.

STI ETF

STI ETF – Click to view larger chart.

The Singapore ETF, which is dominated by the 3 Singapore banks. The index have not broken out for like… 16 years. That is a long time, but if you want to buy something that is not at a lofty valuation, then perhaps this might be it.

Fast Growing Apparel Lululemon

Lululemon
  1. The important athletic apparel segment is seemingly slowing down.
  2. Rising competition from Alo and Vuori.
  3. They have grown a lot and a question of whether they can keep growing at this rate still. Jeffries thnk that earnings next year will turn negative instead of growing double digit like it used to.

Here is the historical price-earnings relative to history.

Nike Trades at Prices Not Seen in a While

Nike
  1. Nike tumbles on weak guidance.
  2. Have lost a lot of talent and might need to rebuild culture.
  3. Nike won big during the pandemic by going digital, and direct to consumers. The online channel became a big win and they doubled down on that and cutting away traditional distribution partnerships. However, after the pandemic stop, people start going back to brick and mortar, which is where they have been cutting back.

The last time Nike trades at this valuation, it was in 2013.

Starbucks

Starbucks
  1. Poor single-digit growth guidance.
  2. High commodities prices.
  3. 33% ROIC company.
  4. 20 times PE, which is at Covid lows.

Hershey Hurt By High Cocoa Prices

Hershey
  1. Commodity prices of sugar and cocoa sky-rocketed.
  2. Expects 0% earnings growth.
  3. Largest market share of chocolate in the United States.

Short Report on MSCI

Index and Data Provider MSCI is always been viewed as a company with a wide economic moat.

MSCI

Prices have taken a breather and you can evaluate whether this is an opportunity.

Here is Spruce Point Capital Management Short Report on MSCI: Link

Real Estate Data Provider CoStar a Buying Opportunity?

If you have seen some of my past US office REIT analysis, you would have came across the name CoStar. They are one of the names that I thought I missed out on but it looks like the boat is back:

CoStar
  1. Data provider of real estate data. Very difficult to find the data they provide anywhere else.
  2. 90% subscription revenues, with 90% renewal rates and greater than 100% free cash flow conversion.
  3. The largest real estate research force.
  4. Owns apartment rental site Apartments.com
  5. Acquired Mattarport recently.

Currently trades at 100 times PE. Looks expensive until you realize the cheapest valuation since 2010 was 50 times PE.

Factset

Factset

Financial data provider Factset have corrected a little. I think these data provide may be vulnerable with the future productization of the AI LLM.

Factsets’ valuation has expanded since 2018 and have settled on a greater than 25 times regime. Current valuation is closer to 2020 valuation.

LVMH

Moët Hennessy Louis Vuitton

Shall not say much.

Swedish Gaming Company Evolution AB

If you are a fan of financial Twitter, you would have encounter how many investors of quality companies frequently talk about Evolution AB.

Evolution AB

Evolution collaborates with casino operators by helping design innovative online games to expand their clients reach. They earn commissions on the online gaming revenues their clients earn.

This video might give you a good idea about Evolution’s business:

This post might be useful.

Celsius Holdings

One of the biggest performers in the past two decade is this energy drink company called Monster Beverage.

And since then Celsius has emerged as a company who could be in the same mode:

Celsius Holdings

Very expensive company and recently there are some evidence growth may be slowing. Whether the slow down is temporary or permanent, the market would repriced their shares and this is what happen.

It is up to you who determine this is just a temporary slow down in growth.

Network Cybersecurity Fortinet

Fortinet

Along with Palo Alto, Fortinet is a high ROIC, high margin business that has been on investor’s quality screen for a while. Prices have come down due to to weak guidance.

Currently trades at 39 times price-earnings, which looks high until you realize that their lowest price-earnings in the past is around 30 times.

Too Many Ideas and No Time

I could have spend my whole Sunday and list some ideas down but that would take up too much time.

My point is that beneath the surface, things look different and that means if you cannot bring yourself to buy expensive, or buy at all-time high, there are alternatives.

These alternatives may help you stay invested, aligned to some of your investment philosophy. This may ultimately result in less stress rather than constantly wondering if you should buy despite current lofty valuations.

This would be less helpful if you subscribe to the one or two-fund portfolio idea, don’t have enough time to learn about individual stocks enough not to harm your wealth. However, I did provide some index portfolio ideas that you may want to explore.

Will this complicate your portfolio? Perhaps.

I would say this is how investors portfolio becomes more rojak. Just be more vigilant that if your broader-based index corrects, you may rebalanced from this cheaper fund back to the broader-based index fund.

But if you are an individual stock investor, I think you will do alright. Most markets are struggling which means prices have not moved up yet, to the point that we may wonder if they would move up at all.

If you don’t want to buy cheaper, you don’t want to buy dear, then there is nothing much we can do already.


If you want to trade these stocks I mentioned, you can open an account with Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.

You can read more about my thoughts about Interactive Brokers in this Interactive Brokers Deep Dive Series, starting with how to create & fund your Interactive Brokers account easily.

Kyith

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lim

Sunday 7th of July 2024

"My point is that beneath the surface, things look different and that means if you cannot bring yourself to buy expensive, or buy at all-time high, there are alternatives."

______________________________________

As I said at the start of the year in my Feb blogpost, never underestimate the power of the S&P500! Don't just buy low P/E for the sake of buying low P/E. Thats almost like buying something for its high dividend 😅 :

" After a review of Macro factors relating to the economy and the markets (amateur level analysis), I have concluded that 2024 is likely to be a green year for world markets. The economy has done pretty well despite the multiple interest rate increases as shown by US jobs data and business in general. From here on, interest rates do need to drop to revert to the mean and it is a matter of time that they do so. Industrial production (and arms/ammunition manufacturing) should remain strong.

Therefore, I feel that my 2024 strategy would be to continue to accumulate World /US ETFs rather than to build up a warchest by buying T-bills. I have set a target in terms of how much I will invest in World/US ETFs each month and track the target.

As I feel that the US market is a little bit overpriced, I might not be able to reach my target as I may be tempted to buy other stocks that seem "cheaper", but its still good to track, to see how far off from my target I end up. So far, YTD, I have bought US$15k worth of US & World ETFs. However, if S&P500 continues to rise, its going to be psychologically difficult for me to continue buying, as I like buying 'cheap stocks' However, I have also learnt to never underestimate the power of the S&P500 😅 "

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