Thursday is garbage night for many Americans, and as the market selloff intensifies this pullback is the perfect time for you to remove the garbage from your stock portfolios.
I have made this point repeatedly over the past five trading days, but I will make it again here. The 3-month Treasury bill is yielding 2.27% and the S&P 500 is yielding -- even after its horrible week -- 1.90%.
Cash is a viable alternative to stocks. You need to know that portfolio managers have that option and are clearly using it this week.
I am not advocating a wholesale "run to the hills" strategy, but as this record bull run shows its age, I am reminded that we have seen -- until this week, anyway -- a striking number of companies with terrible fundamentals being handed unreasonable valuations by the market. Yes, they are garbage stocks.
The whole FAANG phenomenon has befuddled me for years, but, really, those stocks are not anywhere near the garbage category. Amazon (AMZN) could hit $1,500 tomorrow and the stock would still be up 35% for 2018. Also, the company would still be a monster, dominating retail and killing established tech companies in the cloud.
So that's the difference between "due for a pullback" and "should be left out on the curb." It's hard to place a single numerical formula on it, but always remember the words of Justice Potter Stewart "I know it when I see it."
Here is a non-comprehensive list of garbage stocks that should not be in your portfolio in such a nervous market:
I am not 100% convinced that Snap exists. It's basically a government bond fund disguised as a stock, even more uninvestable since bond funds are getting hammered in this market.
Snap raised $3.4 billion in its IPO in March 2017, and through June 30 of this year had only spent $193 million of that on capital expenditures. The rest is just sitting in short-term Treasuries, less the amount that is drained by its negative cash flow.
It makes no sense.
For every 10 articles about Elon Musk's brilliance there is one stating the inconvenient truth that this company is insolvent. It really is.
Things are about to get much worse for Tesla with the maturity of two convertible notes ($230 million maturing on 11/1 with a conversion premium of $560.64 and $920 million maturing on 3/1/2019 with a conversion premium of $359.87) and a depressed stock price making conversion (as opposed to cash settlement) seem like one of Musk's far-off fantasies.
T. Rowe Price (TROW)
I was never particularly impressed with the folks at T. Rowe when I marketed in Baltimore as a sell-side analyst, and the fund giant's inexplicable decision to raise its Tesla stake to 10.2% in the third quarter confirms my theory.
Also, asset managers are going to lose assets as worried consumers pull money from stock funds this week. It always happens during market routs, and it will pressure TROW's bottom line.
More garbage. It's my least favorite social media platform, and in addition to the constant stream of idiocy that fills its site (except for my tweets, of course) this company has chronically low margins and no user growth.
I can't believe it was trading in the mid-$40s as recently as July. I am not buying it at $26.
Fundamentals matter. The fund managers that are causing this rout have much larger portfolios than you do. If you trim the garbage from your portfolio, that will give you a fighting chance of outperforming them.