Sure, it acts better than it should. How many times have we said that? Yes, it held up with some spots of real strength. That's another piece of reassurance.
But the fact is there's a lot of rot underneath, and I think that the market itself may be ignoring the realities of its weakest players.
First, let's talk about index funds and how you may be positioned in them. This weekend Warren Buffett presided over a somber annual meeting. Instead of the festival of investing, we had an older gentleman giving us a brilliant lesson in investing, followed by a remarkable question and answer session with Becky Quick.
Buffett wasn't bullish by any means. And I don't blame him one bit. I came into the weekend's Omaha confab saying it's time to do some selling and I reiterate that. We were selling all day today for my charitable trust after selling pretty heavily at the end of the week. Wanted to get to 20%. We have a conference call this Thursday at 11:30 a.m. ET and I sure didn't want to have to defend a bunch of losers like, Tyson (TSN) , which I bought for the trust when we made peace with the Chinese, thinking that with our now friendly trading partner suffering from a disastrous swine fever outbreak Tyson could clean up.
Nope. The novel coronavirus wrecked the story and the stock plummeted. Buffett, somewhat unwittingly quoted John Maynard Keynes, saying when the facts change you have to change your mind, and boy did the facts change.
But we are by no means selling everything because as you saw Monday, there are plenty of companies doing well. Remember just a few weeks ago we came up with our "Mad Money" Covid index which had more than $11 trillion in market cap vs. $25 trillion for the entire market.
I bring this up, because one of the most telling questions Becky asked Warren was whether we are at the twilight of index investing, as so many people have embraced it. Maybe too many people. I think Warren interpreted the question as a challenge to his dictum that active money managers can't, except in certain exceptions, beat the index especially when you consider fees.
That's factual. Buffet has endlessly shown that the fees wreck the performance, especially when so many funds just try to mimic the S&P 500. It's incredibly hard to beat the index in part, because it is more of a managed index than you think. When a company really falters, it gets the boot and a new, better stock is added. If a company gets taken over a another company, often the best-of-the-best that is not in the index gets added.
But that wasn't the thrust of the question. Becky was asking if the index may not hold up all that well because it has a ton of bad stocks in it. While you could always argue that the bad stocks could come back, I think Warren would agree that that's not the case with the airlines, as he sold all his stakes, 10% stakes mind you, in Delta (DAL) , Southwest (LUV) , American (AAL) and United Continental (UAL) . To me that was a big deal. He basically wrote off these stocks because the situation has changed, and changed drastically even as the companies have tremendous managements.
I feel the same way about whole swathes of the S&P, which is why Becky's question is so pertinent.
Think about it like this. Just this year alone 114 companies have suspended guidance, 79 suspended buybacks and 31 cut or suspended dividends. And this is just the first quarter of the downturn. That's extraordinary. Many people own stocks because of their dividends, especially in an era of low bond income. Not only are these dividends being hacked, they are being hacked by surprise.
We recently had the new CEO of Western Digital (WDC) on "Mad Money," David Goeckeler, and I think the company's doing well all things considered. It's a tech storage company when we have a ton of tech to store. It has a fantastic flash drive business and I greatly admire their technology. It also had a very bountiful dividend, something I asked about when Goeckeler was on the show. I asked him about the dividend and he didn't exactly say it was safe by any means.
I think you might have been sanguine about the situation, especially given the health demand and industry leading product. And you wouldn't expect anything to change.
Goeckeler confirmed how good things were on his recent quarterly conference call. "Turning to our outlook for the fourth-quarter demand remained strong and we expect growth in revenue and profitability."
He then went on to suspend the dividend, which was yielding about 5%, "to invest in the business and support our deleveraging efforts."
I'm not passing judgment on this decision. He knows the business better than I do. I am saying that this kind of decision is incredibly upsetting to investors, because they might have bought this stock precisely because demand is better and the company is doing so well. I also was surprised that the whole shebang went away. Not a cut, a suspension. Shivers.
This would be fine if it were an outlier. But it isn't. Weyerhaeuser (WY) , the huge timber owner, has been a terrific distributor of profits. In 2017, the company paid out 31 cents per quarter, in 2018, it gave you 32 cents and then last year it bumped it up to 34 cents.
The company reported a blow-out quarter, 18 cents when the street was looking at 13 cents. Sales were terrific, $1.73 billion versus $1.68 billion.
But then the company suspended its dividend. It was totally draw-dropping. The Street was caught with its pants down and the first question on the call was about why the company was just suspending it and not cutting it.
Devin Stockfish, the CEO, gave a telling answer: "We look at this through the context of the macro environment and our market conditions. And really, as I mentioned, just an unprecedented situation in terms of what's going on with this pandemic, broad swaths of the economy being locked down. We're seeing historic levels of unemployment, GDP contraction in Q1, expectations that it's going to be much more dramatic in Q2, consumer confidence dropping and really no clear path on the trajectory of the recovery."
Weyerhaeuser's bread and butter is housing, so this next part is suitable epitaph to the dividend: "We're expecting a significant erosion in housing and residential construction as well as ... to some extent larger remodel activity here in the near term. I think we're in the early stages of understanding what that's going to look like. It may get worse for a while."
Huh, that's it? Goodbye dividend?
Brutal.
Now I know there are so many standout companies doing things and growing tremendously. They are indeed in the index. But for every Microsoft (MSFT) or Amazon (AMZN) there are many Deltas and Boeings (BA) or Carnivals (CCL) or Western Digitals or Weyerhaeusers. It's just far more treacherous than the market seems.
I know the comeback Monday was sweet for the bulls. And the big growth techs are extraordinary. But there are many other companies with stocks trading like their dividends are about to go away. If you own S&P index funds, I think it's worth it to do some selling into this rally. If you are in individual stocks and they can grow even in tough times, then you should be in much better shape than those who own both the bad with the good and, believe me, there's plenty more that's bad than you think.
(Amazon, Microsoft and Tyson are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
