Don’t look now, but we are in the midst of a 6 year bull market. What does that mean? Stocks have been rising for 6 years straight. Have you noticed? Has anyone noticed? Does the economy feel strong?
On the ground floor, the short answer is no, the economy does not feel strong. But maybe thats because we forget how weak it was just 6 short years ago.
In the heart of the recession (they say when your neighbors lose their jobs its a recession, but when you lose your job its a depression) the US Government did what governments always do, and that is print money and then print more money. In this case they introduced QE 1, QE 2 and then QE Infinity.
Long story short, during the real estate debt bubble, big banks were leveraged to the hilt (borrowed over $30 dollars for every $1 they had). This led to inflated prices because money was easy to borrow and everyone wanted to buy the same things. More money + Low Supply = High Demand, or high prices (ALWAYS followed by increase in supply for people chasing more dollars).
We all remember what happened. We thought the economy would improve forever, until it didn’t, and then we thought the economy would never recover, and then it did.
Now we are here.
The question you need to ask yourself, has all the printing of money fixed the problem, delayed another problem, or created a new problem. Basic economics teaches us about supply and demand. When there is low supply, this creates a high demand. When there is high demand, suppliers rush to create more supply. Its in human nature, or in economic terms, when rational agents act in their best interest, booms and busts are inevitable.
If you follow Warren Buffett, you are familiar with his mid-west charm, and ability to make complicated matters seem simple. 2 important phrases come to mind.
1. “Be fearful when others are greedy, and greedy when others are fearful.”
2. “Rule #1, never lose money. Rule #2, see Rule #1.”
Maybe they are? But maybe they aren’t. And here is why: Investors are back to valuing companies on user eyeballs and future revenue. This never ends well.
Who else is being greedy? Ask Mark Cuban about the inevitable collapse of the college education system.
And maybe you are thinking, “so what, that doesn’t affect me.” But lets say worst case we are in another tech bubble, fueled by 8 years of low interest rates. These investors aren’t paying cash when they are investing in these companies at high valuations, they are borrowing it from somewhere.
If these investors lose money on bad investments, credit will tighten up, and margin calls will be made to collect on bad debts. Most of these margin calls will force investors to sell their stock in companies that aren’t struggling, usually in high volume.
This causes strong and healthy companies to have their stock prices fall, or as Mr. Buffett would say, “Mr. Market is on sale today.”
When this happens you will be ready. Now get ready!
Take a look around and keep track of stocks you want to buy. What would you buy if it were on sale?
Here is one I particularly have an eye on:
If you have a child, or know someone who does, you have probably heard about this thing called Frozen. Well, it has made Disney a lot of money, so of course Frozen 2 is right around the corner. But this is just a fraction of why Disney is a great company to own.
Espn, owned by Disney, was one of the first to realize how important live content is. In the world of Twitter, no one records a sports game to watch later. While millenials keep ‘cord-cutting’, the one thing holding many back is live sports, or ESPN. Even with the high costs of securing the rights, advertising during sporting events keeps rising.
Additionally, as more and more people start cutting the cable cord, content is king. And more than ever. Netflix is a great company, and has a huge head start. But what makes me nervous about Netflix is all the competition it still faces, and how one wrong move can set them back a few years. So far they have made all the right moves, but with Hulu, Amazon Prime, HBO Go, I really cannot predict what the future of content delivery will look like.
What I can predict is that how ever the content is delivered, CONTENT IS KING. And no one has access to more content over the next decade than Disney!
In addition to pumping out remakes of fairy tales, new cartoon movies and sequals, Disney essentially owns not only every comic book movie (Iron Man, Avengers etc) but Freaking Star Wars!
This movie doesn’t even need to be good to make a gazillion dollars (my estimate). First they will be in the theaters, then on movie channels, then maybe Netflix, Hulu or HBO. Who knows? So instead of betting on who may win the highly competitive content delivery game, just bet on good content for the time being.
At this writing, Disney trades around $105 with a P/E Ratio of 23. Historical averages of healthy companies are around 16. Traders have a saying “Buy at 10, sell at 20” which refers to a companies PE Ratio (Price to Earnings).
Depending on your time horizon, Disney is still a tough company to not want to buy even at a PE of 23. But if we see a correction and Disney falls… well you know what I would do.
Also on my ‘Watch List’ should stocks go on Sale:
Nike and Under Armour: Both of these are in essentially the same markets, so if one does well they both will. There is an increase of health awareness and fitness throughout the US and everyone knows the first thing you need to do before you go back to the gym is buy all new clothes.
Additionally, both are heavily involved with basketball and the NBA in general. Under Armour was especially smart for jumping into this sphere and locking up the likes of Steph Curry. Basketball is currently the most global sport we have (obviously soccer is number one, but that isn’t an American sport first.)
As the NBA enters new markets, Nike and Under Armour do as well. Domestic growth can remain consistent, but their growth overseas could be exponential. They are, much like Disney, very well run companies will great CEOs. This is important and always something to consider.
Thing sports: the teams that have a culture of winning and continue to win all have great ownerships. Teams that continue to struggle and have a culture of losing… well look at the ownership.
The Energy Sector:
Which ever company succeeds, and which ever country grows, and whether you drive more or less the world is going to need more energy, all the time, every year. Don’t fight it. And right now the energy sector as a whole is on sale!
Oil, Natural Gas and Nuclear. Learn to love it.
I am not a ‘trader’, I am merely an investor. I do my best to be greedy when others are fearful and fearful when others are greedy. From 2008-2010 I bought as many single family homes as I could. I have purchased Apple every time there was pullback, and then just recently sold a portion when it touched $129. If it drops I will buy more.
I am currently buying US Energy companies, pipelines, and oil and gas producers. I buy more every single week. I do this because I have a list of companies I want to own before I have the money to buy them. Then when I have the money, I already know what I am buying. When I reach the limit, I cross that company off and go on to the next one.
I also own both Nike and Disney, and if stocks go on sale I will buy more.