September 2018 Update

Imagine for a moment you could go back in time to March 2009, when the market was making its bottom after the Great Recession. With the full benefit of hindsight, what kind of stocks would you have bought if given the chance?
The biggest returns came from stocks that were down the most over the preceding year. These were stocks that, on average, were trading well below the value of the company’s assets. Many had fully funded dividends over 6%. They could be purchased for only 4 to 6 times earnings or cashflow, sometimes cheaper. People were selling these companies without doing the math, reacting emotionally to falling prices entirely disconnected from reality.
Over the following year some of these stocks were up 35%. Others up 50% to 70%. A few over 100%. Some went down before they went up. Some did very little for months before popping higher. But over a two year period just about all of them were up.
What if instead of treating these stocks in March 2009 as a singular event, you treated them as a pattern that could be identified regardless of what the overall market was doing. In other words, why not always look for stocks that are trading significantly lower, whose assets can be acquired at a discount, and whose earnings can be owned for a song? Forget about what the overall market is doing, just focus on the companies. It is no surprise that these types of companies earn higher than average returns over time, fairly consistently.
Now conversely, what happens if we repeat the experiment above but instead we start at the market top in 2007. With the benefit of hindsight, what kinds of stocks would you have avoided?
The biggest losses came from stocks that had significant sales growth with little earnings. These were high flying companies believed to be changing the future. On average they were trading over 30 times earnings, and had negative cash flow. All of them were widely followed by professionals and amateurs alike, and had consensus buy ratings from bank research departments and analysts. In short, trading prices fell tremendously, and some of these companies don’t exist anymore.
Today, when I look at the financial statements of individual companies making up the stock indices, I see a lot of high flyers, little or negative cashflow, and expensive multiples. Sadly, the average investor is making the same mistakes they made in 2007. They will receive a similar result.
The good news is there are a handful of stocks with highly desirable fundamentals that have already bottomed, can be purchased at a bargain price, and are turning higher. We’ve purchased these companies for 50 to 60 cents on the dollar, and with patience we’ll realize full value. These companies will be safe harbours while the most popular stocks and indices decline, much in the same way resource stocks protected investors while the tech bubble burst. I anticipate significant upside for our holdings.

Interesting links

Higher than average returns requires higher than average discipline  

On increasing the hurdle for evidence


Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth