Beyond The Headlines

Boring Stocks for Exciting Times

Recently we had the pleasure of hosting an investment idea Zoom call. Normally, we’d have an intimate “idea lunch” in our Manhattan high-rise overlooking Central Park and the Hudson River. This time, our team and a number of guests (friends of the firm) all tuned in from around the country and as far abroad as Mexico and Bermuda! Only their backgrounds of trees outside the window, beautiful bookshelves, and nautically themed paintings could reveal where they might be. Among the stocks we discussed, we came up with some interesting ideas that we call boring stocks for exciting times.

Hosting an idea lunch before required everyone to be in Manhattan at the same time. With everyone’s busy schedules it’s never been an easy task. This time a virtual Zoom idea call was a breeze to organize. We picked a few dates, and times, and everyone just called in from wherever they are. We may be remote, even far from each other, but thanks to technology we are able to stay connected, and tuned in, possibly more than ever!

There is no question that this year has been full of surprises. From market highs, we proceeded to multi-year lows, followed by a sudden recovery back to new highs. The economy, profits, and employment are still in the midst of a slow recovery. The political backdrop, with presidential elections in November, remains highly uncertain. If that wasn’t enough, the pandemic that has caused enormous disruption in our lives, the economy, and politics seems to be far from over. If these aren’t “exciting times,” we don’t know what are.

Why should boring stocks be appealing in “exciting” times though? We could argue that the stock market has become largely disconnected from the fundamentals. We would even argue that March lows were a more accurate reflection of the economic backdrop than today’s highs.  On one hand profits dropped while on the other, stock prices rose.

But lately the stock market has been a tale of two worlds. One represents a small group of tech companies — asset-light or even asset-free – whose business, clients, and operations are seemingly both everywhere and nowhere. The services they offer have suffered limited headwinds during the COVID lockdowns. The other group — the majority of publicly-traded companies — has suffered from the impact of lockdowns and a drop in economic activity. At best they have been able to hold their ground, even if they couldn’t show growth and expansion. Some are in a position to weather the storm, even taking market share to prosper, while others may yet fail, disappointing investors.

The market, in the near term at least, has favored the high-growth exciting companies vs. the steady but slower businesses. The top five tech stocks (FAAMG: Facebook, Amazon, Apple, Microsoft, Google) have been up some 35% this year, while the remaining 495 stocks of the S&P 500 are down 5% (as of late July). On relative basis, the five tech companies may look like heroes with a 2% earnings growth vs. 38% earnings drop for the remaining 495 S&P 500 stocks.

Does a 2% growth deserve a 35% price rally? And does a 5% price drop accurately reflect a 38% profit decline? In our opinion, both answers are “no.” Simply said, both groups seem overpriced in aggregate.

However, a careful look reveals a good number of stocks with steady businesses that still may have to face some pandemic-related headaches, but are positioned to thrive beyond the current situation. Among those, we still find investment opportunities. On the whole these are quality businesses whose stocks may have rallied lately. Given their high profits and attractive valuations, we see only a minor disconnect between price and value with these stocks. We could even argue that there is a compelling discount between what we pay and what we get. We see them as offering better potential for capital growth and preservation than most of the investment opportunities capturing investors’ attention these days.

Markets have a tendency to change their minds quickly. Today’s FAAMG rally is no different from earlier market enthusiasms. The Nifty Fifty of the 1960s and 1970s present an excellent example. These were fifty U.S. large cap stocks considered one-decision investments that should be bought at any price. They subsequently crashed, and their valuations were brought down. Many – including formerly familiar brands like Polaroid, Sears, and Digital Equipment Company — have vanished or become shadows of their former robust businesses. I highly recommend my partner’s François Sicart’s recent article for more history lessons from past market darlings – RCA, NIFTY FIFTY, AOL and FANGs.

Among the “boring” stocks we currently favor, you’ll see major pharmacy chains, telecoms, food companies, and substantial players in agribusiness, among others. We do supplement this group with more “exciting” businesses, but only if the price makes sense to us.

The next six months may bring surprises, but we remain very comfortable with our portfolio positioning: ample cash ready to deploy, a good-sized gold position to weather the uncertainty, and a thoughtful selection of companies that includes many boring stocks for exciting times.

Happy Investing!

Bogumil Baranowski

Published:  8/27/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.