With yesterday’s 300-point collapse, the Dow is now down 7.3 percent since January 1st. Other indexes have cratered as well. The smaller company Russell 2000 has shed over 11 percent. In the midst of this carnage, investors are understandably searching for “safe haven” stocks that generate dividends, are inexpensive, and offer less volatility than the overall market. Unfortunately, these ports in the storm are few and far between at the moment. People are looking for any excuse to sell stocks right now, which means anyone looking to buy has to be particularly sensitive to headline risk.
Today no sector faces greater headline risk than the biotechnology and pharmaceutical space, especially companies that have engaged in price gouging. In this toxic environment, names like Valeant, Shire, Vertex, BioMarin, and others are the financial equivalent of the Zika virus.
After a rough start to the new year, a lot of investors might be tempted to buy into “fallen angel” companies at or near all-time lows. They’re not hard to find. In the tech sector, GoPro and Fitbit, two profitable and recently public companies, have taken major hits. GoPro is down 90 percent from its all-time high. Fitbit has lost two-thirds of its peak value. Another sector where investors might be looking to buy low is energy, where scores of service and exploration companies are down 90 percent or more. Established names like Denbury Resources, Forbes Energy, Gastar Exploration, Basic Energy, Bill Barrett, and Ultra Petroleum, among others, have all been creamed, and could seem like bargains.
You’ve probably heard by now that last week was the worst opening week in stock market history. But even that horrid headline doesn’t quite capture the sheer scale of the carnage. In five days, the S&P 500 fell six percent, the Dow fell 6.2%, and the NASDAQ fell 7.3%. Small caps fared even worse than the major indexes, with the Russell 2000 shedding 7.9%.
And yet, as ugly as 2016 has been so far, I still see overvalued stocks everywhere I look, especially here in the Bay Area.
First off, I’d like to thank everyone who bought a copy of Dead Companies Walking this year. I had a great time writing the book and it was fun hearing from folks who seemed to enjoy reading it, as well. I probably wasn’t able to respond to everyone who contacted me about it (though I tried), but I appreciate the kind words that many people sent my way. Thank you!
As for the markets, investors have had more than their fair share of emotional and actual volatility in 2015. After all the huffing, puffing, and cussing, the S&P and the Dow are more or less flat. That doesn’t surprise me very much (I expected modest gains for the indexes, at best). But a number of things have surprised me this year, some quite a bit. Here’s my list of the five biggest events of 2015, in order of earth-shattering importance:
If you missed Tim Cook’s interview on 60 Minutes on Sunday, watch how fired up the normally serene CEO gets when Charlie Rose asks him about the billions Apple is keeping overseas (email subscribers can find the video here):
I don’t blame Cook for being angry. I’ve been saying similar things for awhile now. Our corporate tax system is “awful for America.” It would be bad enough if we were growing at a decent, or even somewhat decent rate economically. But in this ‘new normal’ era of slow to no growth, it’s inexcusable.
My last post generated a fair amount of negative feedback on my Yahoo Finance page and on Twitter. There’s nothing quite like waking up in the morning and being called an idiot (and worse) by all sorts of strangers on the internet. I understand that people have strong feelings about Fannie Mae and Freddie Mac, but I have to say, the vitriol of the comments took me by surprise.
Setting aside whether it was fair (or legal) for the government to change the bailout terms for Fannie and Freddie, my main point in writing about the two giant GSEs seemed rather straightforward: the low-priced stocks and preferred shares of Fannie Mae and Freddie Mac are extremely risky investments. If Washington formally nationalizes these companies (or does so informally, as it seems to be doing right now), there is a good chance that their stocks will go to zero. Sure, the big hedge funds and their armadas of lawyers might prevail in court and win the return of the companies’ dividends to shareholders. But even if that happens, it will probably take years. As I wrote in the last line of the post, “There are easier ways to make money.”
The broader lesson of the GSEs for both retail and professional investors can be stated in four words:
On the plane ride back from the Booth Investment Management Conference in Chicago on Sunday, I read the great new book by veteran financial journalist Bethany McLean, Shaky Ground: The Strange Saga of the US Mortgage Giants. The book tells the story of Fannie Mae and Freddie Mac, the two massive GSEs (government sponsored enterprises) that buy, package, and sell pools of mortgage loans. It’s a fascinating, if distressing history. Unfortunately, because our government failed to do away with Fannie and Freddie during the 2008 financial crisis, that history is still unfolding.
After last year’s better-than-expected holiday season, I cautioned investors not to get too hopeful about the seemingly endless supply of retailers looking to rebound. With local stores starting to put up Christmas lights again, it seems like a good time to revisit that advice and check back on the sector. How has retail fared in 2015?
Pretty much the same as 2014, 2013, 2012, and just about every year for the last decade. That is to say: quite poorly.
The Valeant saga is probably a long way from a resolution. Anyone that says they know how it will end is either delusional or looking to influence the stock. That being said, there are a few lessons to be gleaned: