I’ll Buy “Stuff” Stocks When…
You should buy Freeport McMoRan (FCX), Caterpillar (CAT), PACCAR (PCAR).” – that is what I hear from friends of mine, who are in the biz, all the time. They tell me how cheap these stocks are – 3, 6, 8 times earnings. “You are a value guy! How come you are not loading up on them?” they say.
Let me tell you when I’ll buy “stuff” stocks (if ever do buy them because I’ve never really cared for the cyclicality of their business). It’s when everyone stops telling me how cheap they are and that they are “buys.”
These stocks are very similar to housing stocks two years ago: housing stocks were down 50% and looked cheap. Value managers bought just to see their stocks get cut in half again and again.
One needs to sub-normalize earnings in this environment for all stocks, but “stuff” stocks need to see their earnings to be “sub-sub-sub-sub normalized.” I’ve said it before, but it is worth repeating: the global economy just started its journey of going into a recession; demand for “stuff” will drop off the cliff most likely to a lot greater degree than anyone imagines.
I hear from my friends in Russia that the construction business that was booming only in September is dead. Like deader than dead. It doesn’t matter if projects were finished or not, investors took their money and ran. Russia may appear like a special case since its prosperity is directly linked to commodity prices, but the slowdown is happening in the rest of the developing world like China and India… and the list goes on.
Stuff stocks are likely to bottom when they’ll look expensive – their “E’s” will be low or negative. Also, consumers were not the only ones that over-consumed “stuff.” Emerging markets over-consumed earthmovers, tractors and factories. They still have huge overcapacity at a time when the global economy is slowing down.
Have a very happy and safe Thanksgiving!
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I and I suppose many others interested in high yields, low price to book value are interested in REITS.
I think this would be a dood sector to analyze for future reports.
SM
Be careful with REITs. Many are highly leveraged which is poison in the current credit environment. REITs must pay out a certain percentage of cash flow in dividends (I think it’s 90% but I may be wrong about that) so they cannot accumulate much cash for lean times. Also, many REITs are operators of shopping malls which means their cash flows may be impaired if a prolonged drop in consumer spending wreaks havoc on their main tennants, the retailers. I would say do your due dilligence on the REITs capital structures and look first at apartement and/or health care REITs, whose cash flows are more stable. Also pay attention to location; REITs doing business where the economy is stable or growing (like Washington DC) will fare better than those where the economy may be shrinking (like Detroit.)