What would you do if you think the market just has something wrong? What if you think something is way overdone to the downside? That it's ridiculous, but it doesn't want to get it through its thick skull?
Sometimes you have to be patient. Other times you just have to wait. Still other times you are just plain wrong and you have to own that wrong view.
Let's take some concrete examples. Bank of America (BAC) reported today and I thought it was a very good quarter. You have excellent loan growth. Very good expense control. Strong interest income, what they make on your deposits. The actual deposit growth itself showed an outstanding level of share take vs. other banks. The tangible book value of $15.62 per share is the actual rock-bottom worth of the company.
And what did the stock do when the company reported these terrific numbers? After initially going up, it got hammered mercilessly, in part because it has some energy exposure -- not as much as I feared, but it has some -- and in part because people feel the expenses weren't cut enough. I was aghast at the decline given that the stock is so far behind all the other major bank stocks, and when the government eventually allows it to buy back stock in amounts it sees fit, every dollar below that book value is a pure win. I think the market's wrong and the stock will rally. That's why I have been buying it for my charitable trust.
Second is Dow Chemical (DOW). Here's a company that really is doing fabulously with a 43% yield and it is on the cusp of a very important merger with DuPont (DD) that will bring out a huge amount of value as the merged company gets split into three different very focused entities. You are paid while you wait and yet it doesn't matter at all because investors, wrongly, think it is linked to oil, and when oil goes down, it should go down. That's nonsense. But I have been wrong now for a half-dozen points betting that Dow has to bottom. You could argue that I just have to admit I am wrong and move on, and if it weren't for that dividend that's probably what I would have to do. (Bank of America and Dow Chemical are part of TheStreet's Action Alerts PLUS portfolio.)
I have been waiting for Delta (DAL) to report, and the company's been a huge winner even as the stock's been terrible, down 10% for the year going into today's stellar earnings announcement, which included commentary that would indicate it could save $3 billion in fuel costs and other expenses, and, to quote Richard Anderson, its solid CEO, "We expect to again perform in the top tier of the S&P industrials on earnings growth, margins and cash flows despite global economic challenges."
Yet despite all of this good news, it still only sells at 7x earnings, a signal the market thinks Anderson has no idea what he is talking about. There is not a scintilla of evidence that's the case and it's a rarity, and to me it makes no sense.
But then there is Tiffany (TIF). This one is getting pummeled today, down $2.76 or 4%, and I think it is getting exactly what it deserves. Why? Because Tiffany set you up ... again! It told you, like it did the last quarter, that things were going to get much better. And what happened? They got much worse! Instead of seeing its fiscal year earnings down 5%-10% as it warned, they will be down a full 10%. The company had thought things would turn around this corner, but it based that turn on better sales in the United States, which it specifically had pointed out before were hurt by a strong dollar. Well, guess what, it was even stronger. This stock, if anything, deserves more punishment given this intense disappointment created by the company itself.
So, yes, stocks can be wrong and I can be wrong. But I am not giving up on individual stocks and I think Bank of America and Delta deserve to trade higher, while I accept the market's judgment on how wrong it's been to own Dow and that Tiffany belongs in a robin's-egg blue penalty box until much further notice.
