What do you do when the market's wrong? How can you profit off the market's mistaken valuations?
The answer is you have to be bold as all get out. You have to take the other side of the trade.
First, isn't that the height of foolishness? Aren't markets supposed to be all-knowing, totally efficient and incapable of even being wrong? Isn't my course of action reckless if not insane?
No. That's a pile of academic garbage. Of course academics go hand in hand with the media so there will be someone who has staked his life on my being wrong about this - if not everything else - and contends that modern portfolio theory, or whatever, says I don't know what I am talking about.
That's cool. I'm Jimmy Chill. You can disagree with me as long as you don't call me names and make ad hominem attacks.
My problem with the academic thesis is this: I have seen the market be wrong all of the time, but especially during earnings season. There's just such a flood of news all at once that it's too hard to make correct judgments.
Case in point: McDonald's (MCD) . I have followed McDonald's forever; it was a core position at my old hedge fund. Early this morning, when I was trying to digest Dow (DOW) and General Electric (GE) , as well as about a half dozen other companies, McDonald's earnings crossed the tape. I immediately focused on same store sales, always the ultimate arbiter of this stock. Boom, they came in at 5% with the United States giving you 6% comps. I thought it was a typo. Then the company was kind enough to send me a hard copy that I could ponder. There was no typo. It was the real thing.
Then I checked what the pajama traders were doing with the stock, you know the people who trade after hours and before hours while they wear their Doctor Denton feet pajamas.
Sure enough the stock's down. That's right actually down, down about a point in a half. At first I thought there must be a catch. But there wasn't. The pajama clowns were just plain wrong. This one was stealing candy from the baby in Pjs.
Okay, you say, that one's done. Let me give you two that are on the red hot griddle: Starbucks (SBUX) and Advanced Micro (AMD) . This morning I had the privilege of interviewing Kevin Johnson and Lisa Su, respective CEOs of Starbucks and AMD. I spend hours working on these 7 to 10 minute interviews because both you and the CEOs deserve the respect of that homework.
Here's what I saw. First, Starbucks reported 5% global growth including 6% in the Americas. That's nothing short of unbelievable. It was only a few years ago when we were thinking that Starbucks was never going to get back to 4% again, that it was roadkill because of all the boutique brands, the Blue Bottle, Colombe, Stumptown and Blue Stone Lane, etc. Nope, through ingenuity, through better throughput, longer hours, new products, and loyalty programs, Starbucks clawed its way back on top. But, oops, it has a huge China business, it's the source of great growth, and there's the coronavirus. The company has closed half of its stores. It's too dynamic a situation to give a forecast.
That's all I needed to see. I talked to Jeff Marks, the research head for the Action Alerts PLUS club and we knew it was headed down. Why is it wrong? Simple. Coronavirus will crest. When it does the stock of Starbucks will go to one hundred. But it's impossible for most to see that far. What an opportunity.
Or how about AMD? Here's a stock that's been up huge since it reported last. On the conference call the company seemed circumspect about the future. That gave the weak hands and scalpers a reason to sell. What's the truth? AMD is on track to deliver another huge year. It's got a roadmap, it's got the chips and it's got the demand, especially for the new gaming cycle and the endless cloud buildout.
Both stocks are wrong. Neither reflects the real story underneath. Things will sort out. Can they still go down? In an era where a death from the coronavirus from an American who hasn't visited China, nothing can be certain. But I am saying point blank neither stock is priced for the future. They will adjust and until they do, they are yours for the asking.