Has the market made a major rotation?

The Examiner

If you have grandchildren or children, you obviously need to spend more time talking with them about the benefits of capitalism. Somehow as a nation, we have come to rue uncertainty and reward risk avoidance, at least from a governmental perspective.

Therefore, we have a Federal Reserve Bank, on hallucinogenic Ph.D. economists, that dreams it can banish economic cycles. How? By punishing savers in the form of ridiculously low interest rates and pushing as many as possible to speculate. (By the way, the Fed’s supposed risk-avoidance scheme will someday cause the next market and financial crash. But not today. It is rather like trillions of dollars of annual deficit – it will kill us someday, but not today!)

Ron Finke

The stock market is the only playing field allowing for most people’s hope of gain. How else can one explain the price of Tesla?

The growth style of investing has reigned supreme since the zero-interest-rate policy began as the medicine for the Great Recession disease. Therefore, diversification has been punished as well in favor of the new techie darlings of Facebook, Apple, Amazon, Netflix, Google and Tesla.

Since the S&P 500 is weighted by market worth, its normal companies have been like ants in comparison. According to YCharts a rising February market closed with the total value of the 500 companies at $32.12 trillion. So Apple at $2.1 trillion is a full 6 percent of the total. Microsoft in second place is worth another 5.6 percent. Throw in Amazon and Google and you have 23 percent of the entire market value of the largest 500 companies!

For a decade, it did not matter that Tesla had no profits. Same for Amazon for several decades. It has been only and always about the growth of sales and dreams of the future. That is how Tesla is still selling at $953 of stock price per $1 of profit. Its profits are growing rapidly now too, but from an extremely small number.

But in the past four months or so, the inevitable rotation from the growth style to the value style has taken root. For value investors, a garage sale type of price is the key. The stodgy and steady companies can finally get some attention. General Motors (GM), no longer Government Motors, produces millions more autos than Tesla but is valued by Mr. Market at a mere 16 percent of Tesla’s stock value. In comparison, you can pay $9.55 of stock price for $1 worth of profit.

After all, trees do grow to a stopping point in height. If you like buying great stuff at garage sales, the candidates are especially in the energy, financials, industrials and materials bins. Those sectors are up double digits year to date while technology is up an anemic 1.97 percent as of early this week. Happy bargain hunting!

(Statistics from Worden Brothers, Inc., TC2000 software, 2021.)

(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations.)            

Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at rcfinke@stewcap.com.