LyondellBasell Is Set for a Strong Second Quarter

The following is an excerpt from Best Stocks for 2019: LyondellBasell Is Set for a Strong Second Quarter

As we near the end of the first quarter, the competition is fierce in InvestorPlace’s Best Stocks for 2019 contest. Cannabis product maker Charlotte’s Web Holdings (CWBHF) is leading the pack, up 67% at time of writing, but onshore oil and gas producer Viper Energy Partners (VNOM) isn’t far behind at 29%.

Against this competition, LyondellBasell Industries (LYB) and its modest 4% would seem to be getting left in the dust.

But it’s still early, and we still have a lot of 2019 left to go. And I’m expecting LyondellBasell to make it a competitive race, come what may in the market.

LYB Stock Valuation

I’ll start with valuation.

A cheap price is no guarantee of investment success, at least over short time horizons. But it certainly creates the conditions to make outsized gains possible. LyondellBasell trades for 7.2 times trailing earnings and just 0.83 times sales.

To put this in perspective, LyondellBasell’s P/E ratio was over 16 in late 2012; by this metric LYB stock is trading at less than half its valuation of seven years ago despite price/earnings multiples expanding prodigiously across most of the stock market over that same period.

Likewise, LYB’s price/sales ratio has been bouncing around in a range of 1 to 1.4 since 2013. Today’s 0.9 takes the stock’s valuation back to early 2013 levels.

Again, a cheap stock price doesn’t guarantee a hefty stock return, at least not over any specific time horizon. But it certainly creates the conditions that make outsized returns possible.

To read the full article, see Best Stocks for 2019: LyondellBasell Is Set for a Strong Second Quarter

This article first appeared on Sizemore Insights as LyondellBasell Is Set for a Strong Second Quarter

What to Do Now If You’re Losing Sleep Over the Stock Market

The following is an excerpt from What to Do Now If You’re Losing Sleep Over the Stock Market, originally published by Kiplinger’s.

As discussed ad nauseam in the financial press and in mutual fund literature, stocks “always” rise over the long-term.

This may very well continue to be true. But you also should remember that you have limited amounts of capital, and your cash might be better invested elsewhere.

Stocks are not the only game in town.

Even after the recent selloff, the S&P 500 still trades at a cyclically adjusted price-to-earnings ratio (“CAPE,” which measures the average of 10 years’ worth of earnings) of 27, meaning that this is still one of the most expensive markets in history. (Other metrics, such as the price-to-sales ratio, tell a similar story.)

This doesn’t mean that we “have” to have a major bear market, and stock returns may be soundly positive in the coming years. But it’s not realistic to expect the returns over the next five to 10 years to be anywhere near as high as the returns of the previous five to 10 years, if we’re starting from today’s valuations. History suggests they’ll be flattish at best.

It’s not hard to find five-year CDs these days that pay 3.5% or better. That’s not a home run by any stretch, but it is well above the rate of inflation and it’s FDIC-insured against loss.

High-quality corporate and municipal bonds also sport healthy yields these days.

And beyond traditional stocks, bonds and CDs, you should consider diversifying your portfolio with alternative investments or strategies. Options strategies or commodities futures strategies might make sense for you. Or if you want to get really fancy, perhaps factored accounts receivable, life settlements or other alternative fixed-income strategies have a place in your portfolio. The possibilities are limitless.

Obviously, alternatives have risks of their own, and in fact might be riskier than mainstream investments like stocks or mutual funds. So you should always be prudent and never invest too much of your net worth into any single alternative strategy.

Just keep in mind that “investing” doesn’t have to mean “stocks.” And if you see solid opportunities outside of the market, don’t be afraid to pursue them.

To read the rest, please see What to Do Now If You’re Losing Sleep Over the Stock Market

This article first appeared on Sizemore Insights as What to Do Now If You’re Losing Sleep Over the Stock Market

The 5 Best Investments You Can Make in 2019

The following is an excerpt from The 5 Best Investments You Can Make in 2019

Everyone is looking forward to 2019 if only because 2018 has been so ugly. But investors will have to mentally sturdy themselves: Before we can talk about the best investments to make in 2019, we have to quickly explore what has gone wrong in 2018.

The year started with a bang. The Standard & Poor’s 500-stock index returned nearly 6% that month following an epic 2017 that saw the index pop by 22%. But after that, it got rocky. Stocks stumbled in the first quarter, rallied for most of the second and third quarters, then rolled over and died again in October. It hasn’t gotten better since, and investors have had plenty to digest the whole way.

Much of the massive gain in 2017 was likely powered by investors looking forward to the profit windfall following the corporate tax cuts at the end of last year. But that’s a year in the past. Going forward, we’ll be comparing post-tax-cut profits to post-tax-cut profits as opposed to higher post-cut to lower pre-cut. Meanwhile, stock prices are still priced for perfection. At 2 times sales, the S&P 500’s price-to-sales ratio is sitting near all-time highs, and the cyclically adjusted price-to-earnings ratio, or “CAPE,” of 29.6 is priced at a level consistent with market tops.

Fortunately, the new year provides an opportunity to wipe the slate clean. So what might we expect in the new year? Today, we’ll cover five of the best investments you can make in 2019, come what may in the stock market.

Consider Alternatives

It’s difficult to beat the stock market as a long-term wealth generator. At roughly 7% annualized returns after inflation, the market has historically doubled your inflation-adjusted wealth every 10 years. No other major asset class has come close.

Still, you shouldn’t put all of your money in the stock market.

To start, there is no guarantee that the future will look like the past. The stock market as an investment destination for the masses is a relatively new concept that really only goes back to the 1950s, or perhaps the 1920s if you want to be generous. You can’t credibly say that the market “always” rises with time because, frankly, we’re writing history as we go.

Bonds have a longer track record, but bonds are also priced to deliver very modest returns in the years ahead. Adjusted for inflation, the 3% yield on the 10-year Treasury looks a lot more like a 1% yield.

Investors should consider alternative strategies as a way to diversify while not sacrificing returns.

“Alternative” can mean different things to different investors, but for our purposes here we’re taking it to mean something other than traditional stocks and bonds. Alternatives could include commodities, precious metals and even cryptocurrencies like Bitcoin. But more than exotic assets, an alternative strategy can simply use existing, standard assets in a different way.

“The vast majority of options contracts expire worthless,” explains Mario Randholm, founder of Randholm & Company, a firm specializing in quantitative strategies. “So, a conservative strategy of selling out-of-the-money put and call options and profiting from the natural “theta,” or time decay, of options is a proven long-term strategy. You have to be prudent and have risk management in place, as the strategy can be risky. But if done conservatively, it is a consistent strategy with low correlation to the stock market.”

That’s a more advanced way to skin the cat. But the key is to keep your eyes open for alternatives with stock-like returns that don’t necessarily move with the stock market.

To continue reading the remaining four investments, see The 5 Best Investments You Can Make in 2019

This article first appeared on Sizemore Insights as The 5 Best Investments You Can Make in 2019

Is Value Dead?

Value investing has historically been a winning strategy… but it’s been a rough couple of years.

So… is value dead? Should we all just buy the S&P 500 and be done?

The rumors of value’s death have been greatly exaggerated. Larry Swedroe wrote am excellent piece on the subject this month, Don’t Give Up On the Value Factor, and I’m going to publish a few excerpts below.

As the director of research for Buckingham Strategic Wealth and The BAM Alliance, I’ve been getting lots of questions about whether the value premium still exists. Today I’ll share my thoughts on that issue. I’ll begin by explaining why I have been receiving such inquiries.

Recency bias – the tendency to give too much weight to recent experience and ignore long-term historical evidence – underlies many common investor mistakes. It’s particularly dangerous because it causes investors to buy after periods of strong performance (when valuations are high and expected returns low) and sell after periods of poor performance (when valuations are low and expected returns high).

A great example of the recency problem involves the performance of value stocks (another good example would be the performance of emerging market stocks). Using factor data from Dimensional Fund Advisors (DFA), for the 10 years from 2007 through 2017, the value premium (the annual average difference in returns between value stocks and growth stocks) was -2.3%. Value stocks’ cumulative underperformance for the period was 23%. Results of this sort often lead to selling.

Charles here. Other than perhaps overconfidence, recency bias is probably the most dangerous cognitive bias for the vast majority of investors. Investors look at the recent past and draw the conclusion that this is “normal” and representative of what they should expect going forward. This is why otherwise sane people do crazy things like buy tech stocks in 1998, Florida homes in 2005 or Bitcoin in late 2017.

Investors who know their financial history understand that this type of what we might call “regime change” is to be expected. In fact, even though the value premium has been quite large and persistent over the long term, it’s been highly volatile. According to DFA data, the annual standard deviation of the premium, at 12.9%, is 2.6-times the size of the 4.8% annual premium itself (for the period 1927 through 2017).

As further evidence, the value premium has been negative in 37% of years since 1926. Even over five- and 10-year periods, it has been negative 22% and 14% of the time, respectively. Thus, periods of underperformance, such as the one we’ve seen recently, should not come as any surprise. Rather, they should be anticipated, because periods of underperformance occur in every risky asset class and factor. The only thing we don’t know is when they will pop up.

 

 

Well said.

After a period like the past ten years, it’s easy to draw the conclusion that value is dead. But investors drew the same conclusion in 1999… and they were dead wrong.

As a case in point, see Julian Robertson’s last letter to investors.

 

 

This article first appeared on Sizemore Insights as Is Value Dead?

Keeping Perspective: Julian Robertson’s Last Letter to Investors

Growth stocks — and specifically large-cap tech stocks led by the FAANGs — have utterly crushed value stocks of late. It’s been the dominant theme of the past five years. Even the first quarter of 2018, which saw Facebook engulfed in a privacy scandal, saw growth outperform value.

SectorBenchmarkQtr. Return
Large-Cap GrowthS&P 500 Growth1.58%
Large-Cap StocksS&P 500-1.22%
InternationalMSCI EAFE Index-2.19%
UtilitiesS&P 500 Utilities-3.30%
Large-Cap ValueS&P 500 Value-4.16%
Real Estate Investment TrustsS&P U.S. REIT Index-9.16%
Master Limited PartnershipsAlerian MLP Index-11.22

Value stocks in general underperformed, and the cheapest of the cheap — master limited partnerships — got utterly obliterated.

So, is value investing dead?

Before you start digging its grave, consider the experience of Julian Robertson, one of the greatest money managers in history and the godfather of the modern hedge fund industry. Robertson produced an amazing track record of 32% compounded annual returns for nearly two decades in the 1980s and 1990s, crushing the S&P 500 and virtually all of his competitors. But the late 1990s tech bubble tripped him up, and he had two disappointing years in 1998 and 1999.

Facing client redemptions, Robertson opted to shut down his fund altogether. His parting words to investors are telling.

The following is the Julian Robertson’s final letter to his investors, dated March 30, 2000, written as he was in the process of shutting down Tiger Management:

In May of 1980, Thorpe McKenzie and I started the Tiger funds with total capital of $8.8 million. Eighteen years later, the $8.8 million had grown to $21 billion, an increase of over 259,000 percent. Our compound rate of return to partners during this period after all fees was 31.7 percent. No one had a better record.

Since August of 1998, the Tiger funds have stumbled badly and Tiger investors have voted strongly with their pocketbooks, understandably so. During that period, Tiger investors withdrew some $7.7 billion of funds. The result of the demise of value investing and investor withdrawals has been financial erosion, stressful to us all. And there is no real indication that a quick end is in sight.

And what do I mean by, “there is no quick end in sight?” What is “end” the end of? “End” is the end of the bear market in value stocks. It is the recognition that equities with cash-on-cash returns of 15 to 25 percent, regardless of their short-term market performance, are great investments. “End” in this case means a beginning by investors overall to put aside momentum and potential short-term gain in highly speculative stocks to take the more assured, yet still historically high returns available in out-of-favor equities.

There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly, the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.

“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.

As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.

The current technology, Internet and telecom craze, fueled by the performance desires of investors, money managers and even financial buyers, is unwittingly creating a Ponzi pyramid destined for collapse. The tragedy is, however, that the only way to generate short-term performance in the current environment is to buy these stocks. That makes the process self-perpetuating until the pyramid eventually collapses under its own excess. [Charles here. Sound familiar? Fear of trailing the benchmark has led managers to pile into the FAANGs.]

I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.

The difficulty is predicting when this change will occur and in this regard, I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds. We have already largely liquefied the portfolio and plan to return assets as outlined in the attached plan.

No one wishes more than I that I had taken this course earlier. Regardless, it has been an enjoyable and rewarding 20 years. The triumphs have by no means been totally diminished by the recent setbacks. Since inception, an investment in Tiger has grown 85-fold net of fees; more than three time the average of the S&P 500 and five-and-a-half times that of the Morgan Stanley Capital International World Index. The best part by far has been the opportunity to work closely with a unique cadre of co-workers and investors.

For every minute of it, the good times and the bad, the victories and the defeats, I speak for myself and a multitude of Tiger’s past and present who thank you from the bottom of our hearts.

Charles here. The more things change, the more they stay the same. Value will have its day in the sun again, and that day is likely here with the FAANGs finally starting to break down.

Had Robertson held on a little longer, he would have been vindicated and likely would have made a killing. Consider the outperformance of value over growth in the years between the tech bust and the Great Recession:

 

So, don’t abandon value investing just yet. If history is any guide, it’s set to leave growth in the dust.

 

 

This article first appeared on Sizemore Insights as Keeping Perspective: Julian Robertson’s Last Letter to Investors

Finance Blogger Wisdom: What’s a Reasonable Estimate for Portfolio Returns Going Forward?

Tadas Viskanta, editor of the excellent finanical blog Abnormal Returns, asked a group of financial bloggers the following question:

Assume you are advising a pension fund, endowment or foundation. What is a reasonable long-term expectation for real returns for a well-diversified portfolio?

The answered varied, but it seems like the consensus was somewhere in the ballpark of 2%-3%, though some had estimates of 5% or better.

This was my response:

We all know the standard answer: stocks “always” return 7% to 10% per year. But while that might be true over a 20-30-year time horizon, the reality can be very different over shorter time horizons.

At today’s valuations, the S&P 500 is priced to actually lose 2%-3% per year over the next eight years. That estimate is based on historical CAPE valuations, which have limitations (including the failure to take into account differences in interest rates over time). So, let’s assume the CAPE is being unduly bearish given today’s yields and that stock returns end up being 5% better than the CAPE suggests. We’re still looking at returns of 2%-3%.

That’s roughly in line with with the yields you can achieve on a high-quality bond portfolio. So, core assets should return something in the ballpark of 2%-3% per year over the next 8-10 years. Overseas (and particularly emerging market) stocks might do significantly better than that, and commodities might enjoy a good decade starting at today’s prices. So, a diversified portfolio that included emerging-market stocks and commodities might post respectable returns. But a standard 60/40 portfolio is unlikely to return better than about 3% over the next 8-10 years.

There were some very solid, very thoughtful responses from several financial bloggers I respect and follow.  To read the other answers, see Finance blogger wisdom: real returns.

 

 

This article first appeared on Sizemore Insights as Finance Blogger Wisdom: What’s a Reasonable Estimate for Portfolio Returns Going Forward?

Are the FANGs Holding Up a Weak Market?

Data as of 3/26/2018. Past performance no guarantee of future results.

It remains to be seen whether the market is in the midst of a garden-variety 10% correction or if this is the start of a deeper bear market. But it does seem like this market is being held aloft buy a small handful of large-cap tech stocks: the infamous FAANGs.

Let’s play with the numbers a little.

The S&P 500 cratered in early February but quickly rebounded, recouping about two thirds of its loss. And when the market rolled over again this month on trade fears, it stopped short of hitting new lows.

Data as of 3/26/2018. Past performance no guarantee of future results.

But stripping out tech and telecom stocks, we see a different picture. the S&P ex-Technology and Telecom Services Index fell in lockstep with the S&P 500, but the recovery was less robust. It recovered a little over half the prior losses. And when stocks dropped again in March, the ex-Tech and Telco fell to new lows.

Data as of 3/26/2018. Past performance no guarantee of future results.

Now, let me be clear that this is by NO means a thorough analysis. This is a superficial first scan, and I plan to dig deeper this week.

Furthermore, the data as presented here doesn’t specifically isolate the impact of the FAANGs. The S&P 500 ex-Technology and Telecom Services index actually includes one of the FAANGs — high flier Amazon.com (AMZN) — which makes its performance look better than it should. It also excludes stodgy old telecoms like AT&T (T) and Verizon (VZ), both of which have gotten obliterated this year as interest rates have risen… and which didn’t participate at all in the rally earlier this month. Excluding telco also makes the ex-tech index look better than it should.

I’ll dig deeper into the data later to build a true S&P 500 ex-FAANGs index, but this initial look would suggest that the this market is indeed narrow, being held aloft by Big Tech. That’s worrisome… and it makes me believe that more pain could be coming.

Disclosures: No positions in the stocks mentioned.

This article first appeared on Sizemore Insights as Are the FANGs Holding Up a Weak Market?

Don’t Invest Like Stalin

I always try to read everything that Jeremy Grantham’s GMO publishes, but I somehow missed this one until it was republished on Meb Faber’s Idea Farm. Good stuff: Don’t Act Like Stalin.

Lot’s of good takeaways (as always). GMO’s main point was that chasing recent performance is a game you can’t win. All good strategies (and good managers) have periods of outperformance and underperformance.

But while chasing performance is a terrible move, so is sticking with a bad strategy or a strategy that is likely to be a lousy fit in a given macro environment (i.e. owning bonds in an inflationary environment or owning gold and commodities in a severe disinflationary environment).

This is where communication is important. Talk to your manager and ask them to explain their strategy. If it’s outperforming, ask them why. If they can’t explain it (or if they get excessively cocky about it), I’d question how sustainable the performance is. You might want to bank your profits and move on.

Likewise, if they’re having a bad year, ask them why. If they can’t explain it, they get overly defensive or their answer just doesn’t make sense, don’t hesitate to cut them loose. But if their strategy makes intuitive sense to you and it offers diversification alongside other strategies you’re running (that great alchemy of uncorrelated returns!), then give the manager a little leeway.

Not for the manager’s benefit, of course. His or her wellbeing is not your concern. But if you employed them for a reason (i.e. their strategy tends to zig while the rest of your portfolio zags) then you should hang on long enough to get the expected benefit.

As a case in point, Grantham and his team lost half their assets under management in the late 1990s when value lagged growth. But Gratham absolutely killed it in the years following the tech crash… and his former clients that bailed on him missed out.

 

 

This article first appeared on Sizemore Insights as Don’t Invest Like Stalin

Prospect Capital’s Valuation Still In the Dumps

Prospect Capital’s (PSEC) latest earnings release didn’t do much to improve investor sentiment toward the stock. It remains mired in trading range and sits are barely 70% of book value.

PSEC has long been accused of being a little more aggressive than its peers in valuing its assets. But even so, at these levels it is safe to say that Prospect is trading at a deep discount to the value of its underlying portfolio.

We all know it’s a tough market for business development companies. Funding costs are rising at a time when yields on investment are falling due an glut of capital in the space.

So, here’s a novel idea for management: Halt all new investment and instead plow the proceeds into share repurchases. 

I’m not joking. Prospect shares yield 11% at current prices, which is about in line with its new originations. But it also trades at a 28% discount to book value and is diversified. So why accept the risk of a new origination if you can simply reinvest in your own shares and be done?

 

 

This article first appeared on Sizemore Insights as Prospect Capital’s Valuation Still In the Dumps