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Stocks Have Moved From Being "Ridiculously Cheap" to "Very Undervalued"
By: John Petrides
Date: 9/21/2009
The equity markets have been on a wild ride over the past twelve months. As we enter the anniversary of the September/October 2008 economic chaos, the investment world reminisces on where we were and how far we have come. As panic and fear took control of the wheel and redemptions, bankruptcies, and negative momentum fueled the fire, the financial world as we know it suffered a heart attack one year ago. This fear carried into 2009, but it took bold action, innovative programs, and aggressive stimulus policies by global central banks and the G-20 to help us get to where we are today. Confidence is being restored, as evident by the credit markets returning to a sense of normalcy. Economic indicators across the board have, or appear to be, bottoming. Inflation is a non-factor. Capacity utilization is at cyclical lows, yet productivity has increased. This has set the stage for global growth to resume. So where does this lead us in terms of asset allocation?
The markets are discounting mechanisms. They attempt to anticipate future expectations and discount them back at a price based on expected returns. When expectations are skewed from fundamentals, mispricing occurs and investment opportunities are presented. That was the case in the fixed income market, where, after heading into 2009, the investment grade corporate bond market was being valued as if it were high yield junk bonds, and the high yield junk bond market was being priced as if it was sovereign debt of the most obscure emerging market country. I am being facetious of course, but the point is that panic had set in. Spreads were wide. Advisors Capital Management took advantage of these mispricing in the fixed income market, but that window is closing and yields, especially in the investment grade corporate bond market, are not very attractive any more. The investment grade market of the early 2009 is today's high yield market. We are finding attractive yield along certain parts of the curve in the high yield space, and also in the convertible bond market. If you are interested in finding out more, give us a call. Now, let's go to the equity market.
The dislocations from six to nine months ago, presented incredible opportunities for high returns. Stock prices dropped so far so fast that valuations became ridiculously cheap. In some cases analysis sought 2-3x return on certain stocks, with a high degree of probability over the next few years assuming one was able to block out the noise coming from every angle about the end of the world as we know it. One area that we took advantage of was in Technology. Technology stocks, along with everything else, but US Treasuries, got annihilated, and fell into the ridiculously-cheap bucket. We saw tech as an interesting space to add to because most of the companies a. Did not have any debt, so were not impacted by the credit crisis; b. had long term secular growth stories still intact, such as: wireless phones/infrastructure, the emergence of netbooks, virtualization, the build out of data centers; and c. coming out of the recession, businesses will have to do more with less and the paradigm will be to increase IT spending. For our growth oriented clients we added names such as Apple, Baidu, and Cisco to the portfolio to name a few. Although it has had a great run, we still see Technology as an interesting long term space to invest in with solid growth opportunities, and have moved from being ridiculously-cheap to undervalued.
There is plenty of value left in many parts of the market. If early 2009 was to be categorized as stupidly-ridiculously-cheap, then in my opinion we are currently entering the ridiculously-cheap phase. Somewhere in 2010/2011 the undervalued-but-need-to-be-a-more-contrarian phase will finally arrive.
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