Are You a Bad News Bear, or a Bad News Bull?

Equity investing is extremely hard until you master the rules of the road. Most people love to buy stocks when their business is booming and the shares have positive momentum. That works during raging bull markets, but it never lasts, as major price increases typically occur along with price-to-earnings expansion. Indexes and individual stocks can get quite overpriced when that takes place, leading to nasty selloffs, even if company-specific news remains good. Gains made on the way up evaporate rapidly, especially on story stocks, which went up in the absence of profits. In reality, buying shares which have already skyrocketed on great news is the opposite of where great gains await. Here are three examples of bad news buys which paid off handsomely. There were hundreds to choose from. Jack in the Box posted all-time record results in fiscal 2020 (ended Sept. 30, 2021). During May of 2021, ahead of that year's fiscal fourth-quarter report, JACK carved out a peak price of $124.50. It was till fetching over $111 exactly one year ago on Aug. 2, 2021. JACK earned $7.19 that year putting its trailing multiple at 17.3-times. As things turned out fiscal 2022 EPS now figure to be lower, at about $5.89. That would represent an 18.1% year-over-year decline. Most folks would label that bad news. The shares, though, went as low as $54.80 on Jun. 30, 2022. That put the peak to trough downturn at 56% and the exactly 12-month drop at 50.7%. What is the key take-away from that? When share prices go down way more than the EPS do, opportunity is knocking. At JACK's recent low of $54.80 its P/E was 9.3-times fiscal 2022's estimate and just less than 8.2-times it fiscal 2023 (ends Oct. 1, 2023) already trimmed EPS estimate. Both those multiples were less than half JACK's average P/E. At that Jun. 30, 2022 nadir JACK yielded 3.21%, almost double its historically normal payout. Brave souls who bought at the bottom, despite the down year which was still JACK's second best ever, were up more than 29% in just 33-days. JACK has now gained an additional $3.01 per share in Wednesday's session, closing at $73.78. The easiest, and fastest, gains almost always come well before any good news has been released. Here's a look at JACK's excellent long-term history. Now we'll look at similar patterns in Caleres , my single largest dollar holding. CAL's fiscal 2019 EPS - the fiscal year ended Jan. 31, 2020 - were a then-record $2.21. On the good news the stock topped out at $41.09, about 18.6-times that year's earnings. CAL's typical P/E, though, was 13.9-times, meaning momentum buyers were overpaying for the shares. Paying up for record results proved to be horrible timing. Caleres began declining well ahead of the impossible to predict Covid-crisis. At the March 2020 panic bottom CAL had lost over 92% of its good news value. Government imposed shutdowns of non-essential physical stores caused a $1.40 loss in fiscal 2020. There would be no good news for quite a while when CAL was trading for sub-$4. That proved to be a fabulous time to be scooping up shares. About 12-months later CAL had rebounded by greater than 840% from its depressing news nadir. Why was I so sure CAL would be a terrific performer going forward? CAL had proven earnings power of over $2 per share five years straight from 2015 through 2019. Buying south of $4 meant getting in at less than 2-times normalized EPS. Here is long-term data on Caleres. CAL not only quickly returned to its old profitability, fiscal 2012 saw profits rise to a huge new record of $4.29 per share. Now, even on good news, CAL sells for just 6-times expected EPS for fiscal 2022. There is still dramatic upside from today's bargain price. CAL closed at $25.57 on Tuesday. That is $15.52 per share below where it peaked back in 2018 on about half its current EPS. There's no reason CAL can't be $50 - $60 within a year simply by getting revalued to a more typical multiple. Buying during the Covid-panic meant ignoring some of the worst news ever. It also ended up providing life-changing gains for those willing to buy ahead of better news to come. It is not just individual stocks that follow this pattern. The chart below details the S&P 500 index from the start of 2020 through July 31, 2022. The SPY hit what was then an all-time high in February of 2020. Everything was looking good. That proved to be one of the worst times in history to have been buying, though. The Covid-panic low reflected horrible economic news. No truly positive news was anywhere on the horizon. That's when most traders are prone to sell, even at horribly discounted prices. Times like that make value investors salivate. The broad market bottomed on March 23, 2020 and barely took a breather through about Labor Day. September and October of 2020 were rocky, giving investors a second chance to establish nice holdings at great prices. From then on there were few let ups until around year-end 2021. Buying good news proved deadly. Buying bad news worked out great. The Dow hit bottom again in mid-June of 2022. Media pundits challenged anyone to tell them why they should be buying. They asked how people could possibly not think that we'd test the lows once again before long. Fighting that kind of group think is never easy. But it pays well. The broad markets rebounded sharply since those June lows. Always keep in mind that when you feel the most bummed out, and the least happy to own stocks... so does everybody else. True contrarians know that it's OK to feel like everybody else, but it's not OK to act like them.

Are You a Bad News Bear, or a Bad News Bull?

If you want to make money, then buy on bad news (but it has to be the right kind of bad news, and the right kind of stock).

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