Flying Into the Stock Market

 | Aug 12, 2013 | 3:30 PM EDT  | Comments
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Stock quotes in this article:

tsla

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nflx

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sfy

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wpx

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pwe

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clf

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rfp

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mt

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stly

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rell

My daughter was in town this past weekend for a semiannual visit so we schlepped her down to Islamorada in the northern Florida Keys. Given my aversion to frolicking, I spent a lot of time on the shore just watching the collection of birds and other wildlife that are so prolific in that part of the world.

I confess to a particular admiration for the noble pelican. This bird spends a great deal of its time just hanging around, relaxing and observing the world. When it is hungry, it flies out to where it knows there are fish, picks off the easy ones, then heads back to a nice piling or tree to renew the observation process. If a fat tasty fish should swim by his perch, he will react. Otherwise, he is content to sit and watch the world go by for long periods of time.

Now, consider the seagull. This bird seems to spend its entire life flitting from potential food source to food source. It circles in a screaming frenzy looking for an opportunity to eat. It will leave one food source if it thinks the flock has found a better one. One kid on the beach with a hot dog can attract 100 birds that are fighting over scraps.

Once one seagull finds a potential easy source of scraps, the entire flock and every flock within screeching distance come flying in with a great deal of enthusiasm. The late arrivals expend a lot of energy for very little food. It does not strike me a productive approach to finding food.

There is a great metaphor here for the investing process. Most investors are seagulls. They flock from stock to stock, sector to sector, in search of the hottest and brightest ideas. There have been numerous studies showing that individual investors do not earn as much as they statistically should because of this heart- seeking behavior. They trade too much and hold for way too short a time to make a decent return on their investing dollars. All too often they follow the squawking flock into areas that are picked over and ready to fall.

We can improve our results by taking more of a bird's eye view of the market. If you look at stock right now the flock is swarming around stocks like Tesla (TSLA) and Netflix (NFLX) that are popular and priced like lottery tickets instead of corporations. Big dividend paying blue chips have bid up to the point where it looks to me like they are trading for about twice what the business is worth in a slow growth global economy. Large REITs are priced like 2008 never happened and REITs are lining up to come public or do secondary offerings. Restaurant stocks have shrunk portion sizes and released employees so successfully that investors are beating down the doors to buy the shares. When take a bird's eye view of the markets it is easy to see the pockets of excess where the flock is fighting over scraps.

It is also easy to see where the easy pickings for long-term investors are in the current market. Energy stocks are priced as if fossil fuels will never be used again and as if we have found some magic solution to our energy problems. We have not and stocks like Swift Energy (SFY), WPX Energy (WPX) and Penn West Petroleum (PWE) are priced at a discount to their asset value. All these companies have to do is survive and their stocks price should rise sharply over the next few years.

Energy demand may be relatively sluggish right now but it will pick up in the future. Like it or not, natural gas and domestic oil are the paths to energy independence for the United Sates and will be for several decades.

Materials and resource stocks are priced like the world is going to end. I do think it may take a while for the natural human desire to improve their lives overwhelms the incompetence of our politicians. When that occurs, there will be strong demand for things like iron ore, pulp, paper and steel. Right now stock like Cliffs Natural Resources (CLF), Resolute Forest Products (RFP) and Arcelor Mittal (MT) will see strong revenue and profit growth. Again, these companies just need to survive until demand picks up to pay off handsomely for patient investors.

Net net and near net stocks are the fat fish of the stock market. When stocks like Richardson Electronics (RELL) and Stanley Furniture (STLY) trade at levels close to, or less, than what the entire company could be liquated for, it makes sense to pick up a few shares. They are simply too cheap not to own and history shows us that buying these stocks is usually a profitable endeavor.

Investors would do well to emulate the pelican and avoid the squawking flock of gulls fighting over scraps in their approach to investing.

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