The market came under heavy selling pressure in January as investors perceived an abrupt weakening of the global economy. Plunging treasury yields, rapidly declining prices in oil and other industrial commodities, widening credit spreads, and most importantly a corporate earnings season that has been below expectations on average (and well below in certain cases) all appear to corroborate this emerging view.
I have been writing about my major market concerns for many months now, mostly centered around valuation but also several other factors. This outlook has also been reflected in my investment stance of retaining a limited market exposure. While lower stock prices help to alleviate overvaluation, I believe that we are still very early in that corrective process. Accordingly, I did not enter into any new positions this month. Furthermore, I eliminated some holdings in response to changing conditions.
I sold both of my fund’s oil stocks, Exxon Mobil and Chevron, during the month – Exxon at a profit and Chevron at a small loss that is offset by the 4% dividend that was collected. With the price of a barrel of oil in the mid to high $40’s, Exxon and Chevron’s profitability is severely reduced. Consensus earnings estimates assume that oil quickly bounces back to approximately $75, a reckless assumption upon which to rely. Even if this were to occur, the stocks are still overpriced at more than 20 times earnings. If the price of oil, however, stays where it is or goes lower, then the stocks are wildly overpriced at north of 35 times earnings. In short, the last time oil was at this level the stocks were much lower. If the price of oil does not quickly snap back, then the stocks should decline significantly from here.
I also sold Pfizer during January, earning a double-digit return during a nine-month holding period. I sold it for more than 20 times trailing GAAP earnings. While management and analysts prefer for investors to focus on pro forma operating earnings, from my background as a CPA I know that all accounting rules exist for a reason and are not to be ignored.
Michael Berlin can be contacted at firstname.lastname@example.org and at (631) 629-4928 .
The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.