With a few ups-and-downs, Starbucks (SBUX) shares essentially marked time in 2014, up just 3% as we write this, after a spectacular 2013 performance that featured a 43% rise in the coffee seller’s stock.
View 2014 as a year of consolidating gains, then, but Starbucks enters 2015 (the fiscal year actually ended September 28) with an audacious growth program that could make current trading levels a nice entry point. Or, if there is failure to execute on an increasingly complex business model, the 2014 pause could be viewed in hindsight as what was an excellent and sustained opportunity to hop off CEO Howard Schultz’s happiness bus.
Schultz’s twin attributes – grandiose self-regard and weakness for the worst of business clichés, coupled with an amazing rigor and discipline in operating the hot-drinks chain – attach a cult of personality to Starbucks shares, and perhaps a Howard-premium to go with it; the PE ratio based on trailing net income is just shy of 30 right now.
For the love of clichés, sample this buzzword-heavy quote attributed to Chairman Howard (God help his family and friends if the guy actually talks like this; we’ve helpfully italicized the most obvious clichés jammed into his remarks) in Starbucks’ recent announcement of the new five-year plan:
Financial advisors often call it a case of “get-back-itis,” the urge many investors have to hold onto losing stock positions until the shares return to some arbitrary level, like the buyer’s purchase price or, in extreme examples, the stock’s high.
If you happened to buy some of 2014’s big losers – here we see year-to-date results for Sprint (S), Twitter (TWTR), Mattel (MAT), Las Vegas Sands (LVS) and Amazon (AMZN) – you, too, may be feeling the urge to hang on in hopes that your losses are covered by a subsequent gain in the stock. Don’t, unless your up-to-the-minute analysis of the stock suggests you’d buy it now at its current price.
Get-back-itis is also known as the Anchor Trap, and is among a handful of behavioral financial biases explained in a YCharts White Paper; click on the link to download the full report. Most investor suffer from some irrational beliefs that hamper their performance. The white paper explains these biases and offers ways to avoid suffering losses due to them.
Falling oil prices, rising consumer confidence amid an improving labor market, and a smidge of wage increases is not surprisingly fueling expectations for consumer discretionary stocks to outperform. Since the mid October low, the Vanguard Consumer Discretionary ETF (VCR) and the Consumer Discretionary Select SPDR (XLY) are significantly outpacing the broad market SPSR S&P 500 (SPY).
Benefitting from a pickup in consumer spending -- regardless of what is purchased -- are the intermediary payment systems. Both Visa (V) and MasterCard (MA) have indeed been bid up since sentiment shifted in mid October.
It’s not news that consumer discretionary stocks are topping the lists of projected 2015 outperformers. Piper Jaffrey pegs the sector as one of its three overweight ideas (along with healthcare and technology) in the year ahead. And Piper Jaffrey is still decidedly bullish on 2015. It’s 2,350 estimate for the S&P 500 is about 15% higher than where it recently traded.
Exchange traded funds such as Vanguard Consumer Discretionary (VCR) offer a cheap and broad way to tilt toward this sector. The three largest positions, Walt Disney (DIS), Home Depot (HD) and Amazon (AMZN) speak to the broad range of consumer stocks.
For a more nuanced look with consumer discretionary, the Leuthold Group recently called out Retail Home Furnishings and Department Stores as having moved up into their “Attractive” group rating.
In fact, U.S. home furnishing store sales are up more than 4% year to date, and that’s half of the entire sales growth this slice of the economy registered in the preceding five years:
Department stores haven’t had the same bounce. Store sales are down nearly 2% over the past year. But in a market where it’s hard to find value, department stores are intriguing: they are an unloved and beaten up sector that has reasonable upside in an environment where consumers have more to spend away from the suddenly less-expensive gas pump. Moreover, while real wage growth was anemic into 2013, it has begun to pick up:
I’ve asked a number of times over the years – of Leggett & Platt (LEG) in the furniture industry, and of Southwest Airlines (LUV) in air travel, for instance – is it possible to be a great company in a crummy industry?
Meaning, no matter how well managed and financially sound a company is, will the overall poor economics in its industry overwhelm it? For Leggett & Platt, which makes furniture components, a poorly-capitalized and innovation-challenged group of furniture makers and retailers has held back its performance for years. And for Southwest, despite a soaring stock this year, the company has suffered in recent years because of its rivals’ failures; bankruptcies allowed United (UAL) Delta (DAL) and American (AAL) to shed expensive plane leases, union contracts and pension obligations, putting the better-managed Southwest at a competitive disadvantage.
McDonald’s (MCD) may be in a similar situation. That, of course, is not what one mostly reads about the company these days. We’re told its CEO, Don Thompson, can’t seem to get the growth recipe right; that the menu’s too sprawling; that McDonald’s needs to let customers build their own burgers; and that more innovation needs to bubble up from franchisees.
How Sequoia generates those returns is especially interesting: it does pretty well in up markets but its huge value added comes from not losing as much in down markets. Morningstar reports that Sequoia has captured about 77% of the market’s upside moves over the past 15 years while managing to suffer just 49% of the downside. Not a bad approach to have at this juncture in a very long bull market.
If Sequoia has flown under your radar, that’s because it has spent much of the past few decades either entirely or partially closed to new investors as management has carefully avoided fund bloat. Assets are a relatively puny $8 billion for one of the rare consistent index beaters.
A quick turn of the dials on the YCharts Stock Screener produces a list of the S&P 500 stocks ranked by year-to-date return, and if you bought one or more of the stocks at the top of the list – among them Southwest Airlines (LUV), Electronic Arts (EA) or Edwards Lifesciences (EW) -- congratulations.
Congratulations -- and perhaps it’s also a good time to recheck your original analysis. Southwest at $19 early this year is a lot different than at $42 lately. So, some investment research seems in order. The price-to-sales ratio on Southwest has roughly doubled this year. If you bought it at 0.8, would you buy it again at 1.6? Perhaps you would. But merely congratulating yourself on a wise choice – and then sticking with it – could invite some losses.
Studies have shown success in investing can contribute to overconfidence, at times leading investors to stick with a winner even when it becomes too expensive. (We’re not rendering a conclusion on Southwest here, merely using it as an example for explanation.) Overconfidence, of course, is everywhere. One particular study from 2006 found that nearly 75% of 300 professional money managers said they delivered above-average performance. And much of the rest copped to merely delivering average results. Statistically impossible!
Every nook and cranny of the energy sector has taken it on the chin of late. While the SPDR S&P 500 ETF (SPY) has advanced about 7% over the past six months, the Energy Select SPDR (XLE), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), iShares S&P Global Energy (IXC) and the PowerShares S&P SmallCap Energy ETF (PSCE) have all shed considerable value:
Not surprisingly, that has pushed the weighted average PE ratio for the Energy Select SPDR to below 15, compared to near 19 for the SPDR S&P 500. But cheap can stay cheap for a while. If you’re on the fence about whether the big selloff presents an entry point, a technical analysis by Sam Stovall, U.S. Equity Strategist at S&P Capital IQ, includes some interesting intel.
Stovall notes that the current rolling 12-month relative strength for the S&P 500 energy index is around 80. The lowest level since 1990 was a reading of near 74 back in January 1999. The current reading is more than one standard deviation below the mean reading of 88.1 since 1990.Two standard deviations is not far off, at 73.65.
Perhaps you’ve heard of the Loss Aversion bias, established decades ago, that found individuals tend to feel the pain of a loss about twice as intensely as they feel any upside from a gain.
That two-to-one bias is enough to foul up anyone’s risk-reward assessment. But suppose your Loss Aversion was turbocharged, as researchers have found it is for retirees, and you felt the pain of a $1 loss equal to the joy of a $10 gain. It’s enough to freeze an investor into inaction. And if one is already fully invested, and not cognizant of the Loss Aversion, it could produce particularly gruesome emotions during a market correction or other extreme volatility.
Loss Aversion is one of a range of Behavioral Financial Biases. You can download the entire YCharts White Paper covering these biases, and learn more about what makes investors, including yourself tick. Understanding the irrational beliefs that color investment decisions can help individuals make smarter and more informed decisions, and to seek our objective advice.
Bill Nygren, co-manager of the Oakmark fund, is among the plainest-spoken money managers around, explaining stock picks in language we all can understand, and he also holds an enviable record of consistently beating the S&P 500.
He’s a buy-and-hold value investor. So, hearing his point of view at the market’s current high valuation is of great value. Nygren doesn’t regularly drop by the YCharts office to discuss Oakmark’s holdings – the way he did at Barron’s recently – but YCharts does have the web’s best charting capability, so we’re turning some of the thoughts Nygren shared with Barron’s into images.
Nygren Thinks Franklin Resources (BEN) should trade at closer to 18 times forward earnings, which he pegs at $4 a share in 2015, implying $72, instead of the current $57. He’d then add the $12 or so per share in cash to get to $84 a share, a 47% increase from today’s price. Use of the metric PE ratio less cash is helpful here. We’ll add that Franklin grows nicely for such a cheap and cash-laden stock:
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