A Quandary for Those Who Went to Cash

Markets always do their best to frustrate us. Even after decades of experience it is always frightening to buy into panics. At the beginnings of selloffs we think we're locking in great prices. After a while longer, we're often out of money for new positions. By the time everybody else is throwing in the towel most people have no appetite for buying anything even if they already generated cash by joining the crowd in lightening up or cashing out. I've written many times about how individual investors are the worst offenders on that score. Last week's American Association of Individual Investors (AAII) sentiment survey proved my point. Their Thursday morning bearish sentiment score rose to its highest of the year just in time to miss a big rally that day and a smaller decline on Friday to finish out a putrid month and Q3. What happened next? Of course, the first two trading days of October were huge gains. Here's the rub. Many of your favorite stocks already surged by 5% to 10% or more from last week's prices. If you are still in cash, do you wait/hope/pray that you'll get another chance to buy in even cheaper or do you start putting money to work now at significantly higher than late September's quotes? The only thing worse than riding a stock down 10% from where you thought about selling is actually buying those same shares back for more than your recent exit price. Option buyers, as a group, are even worse at market timing than are equity traders. The chart below details the past four years of net bullish option trades, defined as buying calls or shorting naked puts. Bearish option trading strategies are put buying and call selling. During market panics, when bullish strategies are most prone to work out great, there was close to zero volume in those at major bottoms during December 2018, March 2020 and near this year's weakest points in May, June and September. The highest percentage of bullish option trades since September 2018 came early in February 2020, as the S&P 500 made its pre-Covid all-time high. Another more recent speculative option push came in November 2021 after a huge market run-up. The complete lack of enthusiasm from both equity buyers and option traders bodes very well for a continued market rally rather than yet another retest of the lows. My advice? If you see individual stocks that appear ridiculously underpriced, buy them. If they go even lower, buy more. The bottom is either in, or very near. There is now much more upside than downside, providing fine margins of safety. Here's a Potential Low-Risk, High-Return Buy for Today La-Z-Boy is on track for a record-breaking FY 2022 (ends Apr. 29, 2023). Value Line sees LZB's EPS hitting $3.35 this year up from $3.11. It is hard to fault LZB on its past decade of growth, especially as those years encompassed the Covid crisis. As with almost all my selections, LZB's value increased by multiples of what is now reflected in its share price. At its October 5, 2022, quote of $22.95 LZB trades for just south of 7 times current earnings, accompanied by about 2.88% in current yield. Those compare very favorably with a more typical multiple of 15.7x and a normalized dividend of just 1.31%. Even a partial reversion towards the mean valuation could easily justify a quick move up to north of $43.50. My goal is not farfetched. LZB topped out at $42.70 in 2020 on final EPS of just $3.11. It changed hands as high as $46.70 in 2021. The company is completely debt-free, a great attribute in a rising rate world, and has no defined pension plan or preferred shares. I'm not alone in seeing great potential here. Yahoo Finance calls LZB undervalued. They look for it to reach $43 or so by this time next fall, delivering about 90% including dividends. Options on LZB are available as far out as April 21, 2023. Buy LZB or other similarly bargained-priced stocks now, before they're prices run away.

A Quandary for Those Who Went to Cash

The complete lack of enthusiasm from both equity buyers and option traders bodes very well for a continued market rally rather than yet another retest of the lows.

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