• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Financial Services

What If Both Bulls and Bears Are Wrong?

There is a third scenario that nobody is expecting.
By TIM MELVIN Sep 10, 2014 | 02:30 PM EDT
Stocks quotes in this article: ISH, AP, RIG, CCG, APTS

Part of being a value investor involves being a contrarian. Most of the time, you will be standing against the current of market opinion, buying when others are selling in a panic and selling when others are buying stocks with great abandon. You will be buying stocks in industries that are out of favor with the mainstream investing public and that have ugly short-term outlooks. You will be focused on things no one cares about in these short-term oriented markets, like cash flows, asset value and balance sheet strength. Quarterly earnings seasons will be a stepping stone in a long journey, not the stock market equivalent of a quarterly Super Bowl of trading.

You will be spending the majority of your time standing against the idea that has the world in its grip as far as equity markets are concerned. You will not be a believer in new paradigms or regimes. You will not be a bull or a bear on the market, but a seeker of safe and cheap stocks that tries to be agnostic about market movements. Whatever the popular sentiment is, your first question will always be: "what is wrong with this picture?"

Right now there are two central opposing themes that dominate most market participants. The first is the bull case. Interest rates are low and will stay low for a long time. This means stocks are the best game in town and money will be forced to flow into equities. Low rates also make it possible for companies to borrow low-cost money and buy back enormous amounts of stock, providing yet another source of demand. From a longer term perspective, the economic recovery will eventually strengthen and conditions will be strong enough to overpower the eventual rise in rates, and stocks will just keep going higher.

The other side of the argument is that there is no way this grand experiment of the Fed ends well. Rates will go higher and stocks will collapse. Things like the market cap to GDP ratio, the Schiller PE Ratio and Tobin's Q ratio are all very high, and stock prices will have to fall to bring them back into line with economic reality. We have not had a correction for more than five years and the stock market is overdue for a collapse.

Both are powerful arguments. More hold the bull side right now, according to sentiment indicators, but there are still plenty of voices in the bear chorus. The question of the day from my perspective is: "what if they are both wrong?" What if stocks just meander sideways for an extend period of time and allow earnings, assets and cash flows to catch up to current stock prices? What if rates go up in a fairly measured fashion, providing only lukewarm competition for stock prices, and we have a sideways market that offers little to no returns for several years? That is the scenario no one is expecting.

If that happens, how will you make money in stocks over the next few years? The first and most obvious thing to me is something I have talked about almost incessantly over the past few years. No matter what the stock market does over the next several years, community bank stocks should do very well. The economic, demographic and regulatory forces driving consolidation in the sector will exist no matter what happens in the overall stock market. Those banks that remain independent will be those that dominate their local markets and produce the type of earnings and dividends growth that take the stock higher in either a bull or a bear market.

Outside of the little banks, your best chance of making money will be buying stocks that are cheap based on asset value, and pay dividends. If your can buy companies for less than asset value, you open yourself up to what Marty Whitman calls  resource conversion opportunities. In a sideways environment, positive corporate events that unlock asset value will be a primary driver of individual stock returns. Dividends will become a much larger component of stock returns as well, and the focus could shift from buybacks to cash payouts to shareholders.

Focusing on value and dividends can prepare you for whatever happens in the market in the years ahead. Stocks like International Shipholding (ISH), Ampco-Pittsburgh (AP) and Transocean (RIG) are throwing off cash and should hold up better that the market in a correction, due to their valuable asset collections that can be bought at a discount right now. The high yields of REITS like Campus Crest Communities (CCG) and Preferred Apartment Communities (APTS) will provide cash returns regardless of what the market does in the future, and there is always the possibility of a transaction that unlocks the value of the assets no matter which scenario plays out.

Small banks value and dividends are the contrarian way to succeed, regardless of what prediction comes true.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Tim Melvin was long ISH, APTS, CCG, AP.

TAGS: Investing | U.S. Equity | Financial Services | Stocks

More from Financial Services

Insiders Are Stepping Up and Buying Shares in These 2 Companies

Bret Jensen
May 25, 2022 11:30 AM EDT

A provider of technology for managing smart homes and a financial services concern are finding interests from directors and officers.

Crafting a Technical Strategy for Insurer MetLife

Bruce Kamich
May 24, 2022 8:31 AM EDT

Let's go MET? Here's how traders can play the stock now.

Berkshire and Buffett Rightly Put Their Value Stamp of Approval on Citigroup

Brad Ginesin
May 17, 2022 10:01 AM EDT

The nod from the Oracle of Omaha's company could signal that it's finally the right time to buy the banking giant.

SoFi Technologies Is Primed for a Rebound

Bruce Kamich
May 16, 2022 8:50 AM EDT

Here's where the shares may be headed next.

Affirm's Results Impressed and Here's Why I Want a Piece of the Action

Stephen Guilfoyle
May 13, 2022 11:00 AM EDT

There are several reasons why the shares were trading higher.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:33 AM EDT PETER TCHIR

    Thoughts Ahead of the Fed Minutes

    Recent economic and earnings issues are convincing...
  • 02:24 PM EDT PAUL PRICE

    An Interesting Chart

    I'm betting heavily that stocks will be way up aga...
  • 10:10 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "Market Timing for Dummies"
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login