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Financial Fitness & Life Planning

Top-Down Analysis Corroborates Bottom-Up

The stock market rallied back on low volume during August.  While it is possible that this late summer strength will continue further, I consider it more likely that it was a reflection of market complacency during vacation time (indeed divergences such as small cap underperformance have continued).  The market has now gone three full years without a 10% correction – triple the long-term average length of time.  As always the guiding factor in my broad market analysis remains valuation, and all of the measures that I track uniformly continue to paint a picture of major overvaluation.  The valuation methods upon which I focus are chosen based on their historical reliability in terms of predicting long-terms returns.  Presently these projections are for unacceptably low returns given the risk inherent in an asset class that has demonstrated a repeated susceptibility to losing half of its value.

While none of the preceding analysis guarantees any sort of immediate market weakness, it certainly does suggest that the dearth of investment opportunities that I am presently locating on a bottom-up value basis makes sense from a broader perspective as well.  Regardless of this broad market analysis, however, I will continue to execute my strategy of cautiously and carefully selecting stocks of only the highest quality when they are available for purchase at value prices.  My definition of quality includes some combination of the following attributes: sustainable competitive advantage (often resulting from size, prominence and market share leadership), stability of earnings, healthy dividend payouts and a strong balance sheet.  While the stocks of companies of such a caliber are not often undervalued, it does in fact occur with enough frequency in order to build a portfolio of 15-20 stocks.  Even in overvalued markets I have still usually been able to find one new stock per quarter.  Of course, in other market environments there can be a plethora of stocks that are attractively priced all at the same time.

This month I repurchased AT&T.  While I am skeptical of its looming DirecTV deal, the stock had declined more than 5% since I last sold it.  Amongst cell phone operators, it essentially shares a duopoly position with Verizon because of their combined commanding market share.  With a higher dividend yield, a lower debt level and an improved network, I prefer AT&T shares over Verizon. 

~~Michael can be contacted at 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.



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