Value, or a wasting asset? These are the questions that owners of energy and bank stocks are facing at year end, when they look at their portfolios and recognize that the pain may simply be too great to bear for 2019.
As we prepare for our final Action Alerts Plus club call, I find myself mulling over how I could have seen value in two groups that seem to be be valueless. It's hard not to feel like an idiot when you evaluate these groups.
Yesterday, for example, I got a call in the Lightning Round about an obscure bank stock. I reacted viscerally saying that I didn't want the caller to go, willingly, into the house of pain. Not long after, an Action Alerts Plus club member correctly called me out on Twitter, mentioning that I keep a couple of bank stocks as "ones" -- meaning stocks that I recommend; a one being the equivalent of a buy recommendation.
There's great value here, I tweeted, it's just not being observed right now.
Then Thursday morning I am watching Worldwide Exchange being hosted by my friend Dominic Chu, and he asks a portfolio manager whether he sees value in the oils, and the manager says they are great buys because, in part, they have stopped going down even as oil just plummeted 30%.
Both analyses are spot on. To sell Goldman Sachs (GS) at 7x next year's earnings just seems dumb. To get rid of Anadarko Petroleum (APC) , one of the best oil companies in the world, with real growth and a very good balance sheet, just doesn't seem like the smart thing to do.
So why am I reluctant to pound the table? Why did I think critically about the portfolio manager who raved about the oils? Why did I not say that the caller should just go buy any bank here, they are all so cheap?
Two reasons. One: there is no catalyst within the timeframe people tend to want, and there are so many other sectors with better prospects. And two: beleaguerment. I just feel beaten. These stocks are doing things they shouldn't be doing. They don't go up on good days and they go down hard on bad ones. They have no natural buyers. And they act as if they are simply going away.
Why is that?
I could go into all of the usuals: yield curve, slowing economy for banks, commodity risk for oils.
But if you step back and analogize to another concept, these stocks have no natural defenders. They are prey. With no ability to help themselves.
Think of it like this. If this were any other business, these banks would take themselves private or would be bought by other banks. I mean, really, Goldman selling right through its actual cash value and less than half the market multiple? That's insane. It shouldn't be public or it should be bought by JP Morgan (JPM) for heaven's sakes. If the people stayed -- a big if -- JP Morgan's stock would go up huge.
But it isn't going to happen. There's too much concentration among the big banks. Goldman wouldn't want to sell. All that juicy corporate overhead stays. There's no real dividend or buyback protection and not a lot of growth. No natural defense. And if it tried to protect itself with a hefty dividend and monster additive buyback, the regulators would be all over it.
Goldman's undervaluation is extremely complicated by this Malaysian miasma that it can't get its arms around. But let's face it, the reaction by many diversification-seeking portfolio managers is to go into tech, as in Mastercard (MA) , Visa (V) and American Express (AXP) . Who doesn't want growth in a no-growth group?
Oils? Why in heck aren't they merging? We should come in everyday and see combinations. That's what you do when you want to rationalize and deal with the ravages of this tape. But they don't. And, other than a couple of the majors, like BP (BP) , they too, have no natural defenses, no dividend or buyback protection.
People would rather own consumers of energy -- the utilities -- rather than the producers, and the utilities have more growth and better dividend protection. It's almost farcical.
Then why bother? I am a firm believer that it is not possible for Goldman to stay this cheap versus book and earnings. It's never happened before. I refuse to run from the oils down here when I think that the price of oil can stabilize.
But run to them? I want to tell you to, but I just can't figure out what changes to bring the value out. To sell out now, though, seems too emotional, too reactive, to defeatist. Maybe that's what a bottom looks like, a point of maximum pain? Don't look now. I bet it is.
