Who knew stocks could actually go down? We have had our first down month in the last six months, and prices have continued to move lower. The market has successfully shrugged off the geopolitical news, but events in Ukraine and the Middle East are finally creeping into prices. We have seen some earnings misses, and blown deals weigh on stock prices as well. The talking heads are finally talking about the potential for a correction; while the ZIRP-addicted buy the dip, cheerleaders are ramping up their rhetoric a bit as well. The two sides make a lot of noise and investors' heads are spinning. Do we run and hide or buy the dip?
Let's try to inject a touch of reality to the situation. Over the past month, stock prices as measured by the S&P 500 are down about 2.7%. We are still just about 3.5% off all-time highs in the market. We have seen a little selling, but this is not a major pullback or even a minor correction yet. Keep in mind that I am one of the few who want to see a pullback in the market and, as far as I am concerned, the further the better. I have a lot of cash to put to work, and the number of solid companies trading between 90% and 125% of book value is tantalizing. I would love to see them all fall down to bargain levels, where they are too cheap not to own. This has not happened yet.
When I look at the S&P components, I do not see any huge inventory creation going on. The biggest losers over the past month have been the homebuilders, as the housing market is far less robust than anticipated. Anyone who jumped on my chicken short call back in May has done pretty well, but these companies could fall further as they still are not cheap. No U.S. home builder trades below tangible book value yet. I would love to see them fall to that level, as the decade-long opportunity in housing is pretty solid, but the short-term outlook is not great right now.
We have seen some of the utilities in the index pull back as well. Fears of higher interest rates and less than stellar earnings results are weighing on these shares right now. Again, they may have fallen a bit in price but they still have a long way to go to be cheap. I have made a lot of money over the years buying electric utilities below tangible book value, and not a single US regulated utility trades below book right now.
There are 25 stocks in the index trading below book value. In comparison, at the last market bottom over 100 S&P components companies traded below book value. The past month has been a tiny decline, not a major buying opportunity in America's biggest companies.
When I point my screener at the broader market, this minor pullback has not created any additional safe and cheap inventory. Some old favorites like West Marine (WMAR) and Ampco-Pittsburgh (AP) have sold off a bit, and if you don't already own those bargain issues it might be worth starting a position in these names. Some of the shippers, like Baltic Trading (BALT), have also pulled back to levels worth consideration. Lakes Entertainment (LACO) has slipped a little, and the shares trade for less than what I think you can liquidate the company for at this level, so it's probably worth picking up a few shares on the recent weakness.
From the point of view of long-term value investors, it is not time to jump into the fray and dump your cash into the market. You can scale into a few bargain issues that have slipped up a bit, but there's not much else to do outside of community banks right now. As Doug Kass pointed out this morning, nimble traders can chase this tape around in circles, but for investors there is not much to do. It is definitely not time to buy, and unless you are a risk arb who came into yesterday levered five to one, there is no reason to panic here either.
Let the talking heads and pundits debate panic vs. dip buying. The correct action is to do nothing right now. This might be a good time to catch up on your summer reading, or knock a few strokes off your golf game.