Everyone's Chasing Growth

Dan Shainberg
September 8, 2018

Warren Buffet is famously quoted as stating "we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

Right now the economy is in a "Goldilocks Scenario," a situation where the economy is growing at a strong clip while inflation is in check. This allows the Fed to keep interest rates relatively low and any interest rate hikes reasonably predictable and steady. It is primarily because of this historical tailwind and macro momentum that investors are feeling ebullient.

I recently spoke to a hedge fund manager colleague who proudly stated how much money he is making this year because he simply looks for stocks that "have been going up." He admitted that he does not know much about those companies, their prospects, their market position, competitive outlook, leverage, downside risk if something changed or really anything fundamental about the business that he purchased a small percentage of. He just likes the fact that the stock was moving higher in the short term.

The problem with this style of growth and momentum investing is that stocks don't just move higher and higher in a straight line. At some point there is always volatility or a downturn, and this type of trader has to know whether or not that is the predictor of the next massive selloff or just a blip on the chart higher. But if the market is hot, and everything with momentum keeps moving higher, then it is easy to fall into the trap of thinking that will last forever.

Of course not all growth stocks are bad or unfavorable. There are some companies that legitimately can grow for many years past their elevated valuation. But we have also seen numerous examples, some recently, where the hype and momentum turned violently downward after the last lemming disappeared. These traders bid up sometimes questionable companies (or digital coins) to unreasonable levels while ignoring any semblance of risk analysis by creating their own self fulfilling prophecy and crowding into each other's trades. It's like a ponzi scheme where you never know who will be left holding the shiny, yet empty bag.

Warren Buffet is also famous for this quote, "It's only when the tide goes out that you discover who's been swimming naked."

What surprises me most about this market is not that these investors have to pile into gold, bitcoins, marijuana stocks and companies trading at P/E multiples in the hundreds. What is so shocking is that the "value" segment of the market is offering up a ton of opportunities! There are numerous packaging companies with super stable business models, predictable catalysts, improving industry dynamics and management teams committed to returning cash flows to shareholders. These companies are recession resistant and offer up free-cash-flow yields of 10-15%. That is an unbelievable return opportunity especially when incorporating the low risks which can be compared with investment grade bonds. The IG bond index yields 4-5% and has no growth. These value stocks yield 2-3x as much with growth opportunities.

At some point the tide will return. Those ICO investors have already seen what happens as the bitcoin bubble popped in 2018. Value investing is out of favor today. Most investors are searching for "safe yields." It's right in front of us!

Dan Shainberg

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#RecessionResister

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