Before we head off into the weekend, I want to share my final thoughts on making money in a low-growth world. I have long said my analysis drawn from walking around outside talking to people is not showing a robust economy but rather one I like to call better but not good.
One of the commentators on today's jobs report said they thought wage growth would accelerate as we are now at full employment. While I'm not a rocket scientist or highly trained economist, the labor-force participation rate is telling a much different story from the unemployment rate.
The 62.7% rate means that 37.3% of eligible Americans are not working. I am still seeing lots of layoff announcements, particularly from the energy sector. When I talk to the under-35 set, those without Wall Street-specific degrees are having a hard time finding full employment in their chosen fields. I am not a complete bear on the economy, but my view is that it is not horrible but it's not great either. A majority of the bankers I spoke with this week in frigid Phoenix had a similar view. A slow-growth economy means tepid earnings growth and some real challenges for investors.
One place to look for growth is stunningly obvious. Cybersecurity and its close cousin, cyberwarfare, are subjects I have mentioned several times recently. I have serious doubts about moving all our data and records onto the cloud, but neither business nor government checked in with me on the idea before implementing. With all that information out there, hackers are going to be working overtime trying to crack into potentially lucrative databases full of anything from Visa (V) card numbers to highly sensitive government and military secrets. Protecting that data becomes mission No. 1 for businesses, governments and individuals.
So far, I have a tippy-toe in the water with my positions with shares of Kratos Defense and Security Solutions (KTOS) and Unisys (UIS). The Unisys Stealth product is getting very little attention in the stock market but lots in the markets where the product is being sold. I have an eye on Vasco Data Security International (VDSI), as the stock has traded down to the point where it has an EV/EBIT ratio of just 7.5. The whole sector is working its way up to the top of my "please crash so I can buy these and hold for a few decades" list. Growth here is inevitable.
A focus on industries undergoing consolidation trends can also help us profit in a low-growth world. Community banks are the most obvious, and if you are not involved in the trade of the decade you are making one of the biggest sins of omissions of your investing lifetime.
There is likely a trend developing in REITs as well. The Harvard Law School Forum just posted an article titled "REIT and Real Estate M&A in 2016" that suggested M&A activity should continue at a steady pace, with a number of public-to-private and public-to-public REIT mergers already in the works. The authors noted that higher valuations in the private real estate markets than in the public REIT markets along with low-cost debt almost encouraged such activity. This topic is worth a column all its own, but I will plant the seed here. Playing consolidation trends is not quite as high probability as risk arbitrage, but it is not far off if you determine the characteristics of likely buyers and sellers.
The other way to deal with a slow-growth world is to conserve, or even hoard, cash in spite of the low interest rates. When we do this, we are not as worried about our interest rate return but the power of that cash as a tool. We are going to sit back now and wait for the next, inevitable crisis to develop and buy into the crashing markets. I have been told that's a silly way to invest because no one can see a crash coming and it is only known in hindsight. The empirical data seem to say different and folks like Andy Beal, Gerald Ford, Sam Zell, as well as Warren and Charlie have become very rich by waiting until the first guys to repeat the quip about blood in the streets are now bleeding in the streets to buy.
Being a crash buyer is not easy. It requires a lot of patience in an increasingly impatient world and you have to tune out the massive flow of daily news urging you to buy, sell and trade, trade, trade. Once you buy, prices will probably go lower before reversing and you will need to hold your stocks until the sweet tingle of euphoria creeps back into the air around Wall and Broad. It is not easy and requires extraordinary patience and discipline, but it can be done and it can make you very wealthy.
Dealing with a low-growth world brings a different set of challenges for us as investors, but if we think outside the traditional Wall Street box and spot the few industries that pretty much have to grow no matter what the world is doing, we should still be able to make money.
