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My Journal

I keep a journal of my market thoughts and observations each day.  It's just a cheap bound writing journal book like any you would use to write essays back in school.  I date each page and literally scribble stuff like which sectors are leading, important lines in the sand for certain stocks or market indices.  It's a mess but strangely I like it that way.  I make special notes about ideas I'd like to research further.  I circle things 20 times if it's a WOW thing.  Softer ideas are barely legible.  The value of the journal is that I often find many of these scribbles to be predictive clues about real opportunities and threats even if they were just hints at the time.  They act as my own early warning signs giving me a chance to watch and wait for confirmation from our more defined investment process.  In a way, the journal provides a mechanism to build confidence for that important moment when we must act.  It also serves to remind us of lost opportunity when we fail to do so.  Here are a few relevant notes from my journal that you might find interesting.

2130

I circled this number many times on my April 24th Journal entry.  I can barely read my own writing these days but above it, I also wrote Break out or Fake out?

On that day, the S&P 500 made a valient attempt to make a brave new high but ultimately closed at 2117, the same close that we saw on March 2nd.  Intraday, the index did move out to 2130, so that was my new line in the sand to mark a real breakout from this very long and unproductive flat spot in the global stock markets.  Almost one month later during the entire week of May 14th, I read one headline after another revelling in the glory of ALL TIME NEW HIGHS for the market.  So I flipped back to this page in my journal and saw 2130 circled.  No, the market did not make a new high! They got it wrong - another clue.  Yesterday, the S&P 500 lost over 1% taking the index back below all of the closing high levels of the year (again).  The markets are still treading water and what was sold to us all as a clear break out to all time new highs so far has proved to be just another visit to the top of the 2015 price range. 

Looking for GARP stocks

Also in my notes was a clue to look into growth stocks selling at a discount  (GARP= Growth At a Reasonable Price).  On the same note page from April 24th, you might be able to see he symbols QCOM and BABA noted near the bottom. While the global stock indices continue to sit idle waiting for some catalyst to break out or break down, I continue to see some reasonable opportunities developing in individual stock names from the GARP perspective.  Conceptually, investors are probably conscious of the fact that summertime can be troublesome for the markets as a whole and might be searching around for relative value not to be confused with deep discount value stocks.  Remember, this is still a growth market, we’re all just looking for a few things to buy on sale.


Thankfully, there are lots of names out there that have been beaten down for a variety of reasons. The situations that we find attractive now are those companies that have been market leaders for much of this bull market but have recently gone through healthy consolidations in price offering us a potential entry point for new buys.  These are growth companies selling at a reasonable price.  We are looking for trailing 12 month P/E ratios below market or below their historical norms.  We are looking for companies that have reasonable debt to equity so as to not make them overly dependant on financing in a potentially adverse interest rate environment.  Similarly, we are looking for high free cash flow to enable shareholder dividends, organic growth or possible acquisitions.


Today we bought into Qualcomm (QCOM) in our All Season strategy in the dividend payers bucket after “noting” signs of high volume buying on the 14th and 15th of May.  The stock retraced a bit in sympathy with the US stock market over the last several session providing us with a nice entry point today.  Qualcomm fits the bill for the type of growth stock we are looking for.  For those looking for a solid growth stock subscription service, I have found the CheckCapital.com, Blue Chip Investor to be an excellent source.  Author Steven Check sticks to his guns with his fundamental work but doesn’t even try to mitigate market risk or do any sort of technical price trend following.  That can be tough in a bear market.  We do own several of his recommended stocks in our strategies but wouldn’t hold most through a nasty bear market.  I clipped this graphic of the relative P/E values for Qualcomm dating back to the early 90’s from his May Newsletter.  




Today’s P/E of 13 is obviously pretty darn cheap for a company that has an18% trailing 5 -year earnings’ growth rate, zero debt and returned $8.1 Billion to shareholders in 2013 as dividends from free cash flow.  Furthermore, Qualcomm is in the right sector for this market (semiconductors) and has a 97% market share in 4G LTE chips for smart phones.  Pretty good looking at this level; now if the price will just do a little jig higher for us.  There quite a few other growth names out there all with different stories and developing opportunities while the global stock indices are stuck in the mud.  But the theme of looking down for growth stocks is one that has been notable since March. 


Asia/ Japan

            

My notes have scribbles everywhere about Japan and China.  These countries continue to sit solidly at the top of our weekly rankings.  Honestly, it’s been a tough train to catch which probably means both have a long way to go higher.  The longest and strongest bull markets are always the hardest to find good entry points.  Japan in particular is coming out of a three DECADEs long recession.  They have become as lean and mean in the process as possible given their very high values in the Yen.  Now that the yen is in reverse, we have that situation where Japanese stocks can be wildly profitable with a nice currency tail wind, especially those in the export business.  I wish we owned more pure Japanese funds and ETFs and we may just have to chase this one.   I had to break into my 2012 journals to find the first “clues” about the rise of Japan.  I even wrote about it on the Red Sky Report in early January of 2013 “Watch the Rising Sun”.  But damn if I haven’t ignored the clues.  I don’t think it’s too late but wanted to call out the fact that writing down a good idea means zero if you’re not willing to act on it.   China is in a long term bull market and now leading other world markets higher.  I do not find a 7% GDP number to be bad in any way despite coming down from 9% in the last few years.  The shear magnitude of a country the size of China emerging from its status as an undeveloped country to a global leader has long term bull written all over it. We are building long term core positions in Asia/ Pacific and Japan in all strategies now.   

 

The point of maintaining a journal comes home during these periods when opportunities lie outside the mainstream index mania.  We need to listen a little more closely to subtle clues and recognize where to look and when to act.  In fact, several of my recent journal entries are circling around the very concept that our markets have rewarded overly simplistic passive index strategies for too long, perhaps another larger change is coming.

That’s it for this week – Monsoon season seems to be coming to an end up here in Steamboat Springs.  Looking forward to something called spring.

Cheers!

Sam Jones