Doing Less

As the market has risen it has become increasingly difficult for me to find stocks that meet my value criteria. I look for companies with predictable free cash flows at a low price. These companies suddenly seem few and far between. I tend to stay away from companies that are highly levered, capital intensive or cyclical.

During 2010, 2011 & 2012 there were periods when the market got ahead of itself but I was still able to find bargains. During that period healthcare, select consumer staples and enterprise software companies were trading cheap even when the market became expensive. Even though there were periods when the market as a whole became unattractive I did not have  a hard time finding individual securities. Currently, I can hardly find any new stocks to buy that meet my criteria.

The reason I believe this has occurred is that the market has rightfully put a premium on companies with more predictable free cash flows. But I cannot help but wonder if I am becoming more complacent and not looking hard enough. This weekend I came across  a chart that argues for the former. Defensive stocks are more expensive than they have been to cyclicals in forty years.



I have made some adjustments to my strategy by buying select cheap, cyclical stocks but carefully hedging out the cyclical risk by shorting similar companies. However, for the most part I have been selling off positions as they reach my targets without being able to replace them.  The past few years have been ideal for my strategy but the current environment argues for doing less and that is precisely what I am doing.

16 comments:

Shubh Desai said...

I find couple of stocks cheap such as VOD (with their VZ wireless stake) and AAPL (with their cash).

Tsachy Mishal said...

VOD is my largest position and I am eyeballing AAPL but don't have a position yet.

Shubh Desai said...

I bought both VOD and APPL yesterday and both pop today. Nice entry point :)

Tsachy Mishal said...

I have no opinion on Gold

Tsachy Mishal said...

Congratulations!

Shubh Desai said...

I am also thinking of adding Gold to my portfolio some time this week or next as an initial position. Currently I have none and this might be a good opportunity to diversify.

Doing Less | Fifth Estate said...

[...] See full story on capitalobserver.com [...]

Thursday links: sacrosanct stories - Abnormal Returns | Abnormal Returns said...

[...] Cyclical stocks are looking cheap relative to defensive stocks.  (Capital Observer) [...]

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[...] Cyclical stocks look cheap versus defensives – Capital Observer [...]

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[...] holds are still looking cheap relations to defensive [...]

Adam Okhai said...

I am trying to force myself to sell securities that seem to have
risen too much. Have found it a tough decision to implement.  Finding few securities at good value . I am
sure they exist and many are likely worth buying but generally they elude me. One
value screen I ran produced just two names (GLW and NOV). I do find better  values in non-US markets ( Brazil, Canada) (I   don’t know
enough about S Korea). But going oversees means getting an extra decision right
--- the ForEx exposure. Generally it seems prudent to sit out the somewhat high
levels in US markets and be prepared to accept that doing nothing could well
result in significant opportunity cost.


 


The ideas mentioned here re VOD and AAPL are worth pursuing.
AAPL might be vulnerable but there now appears to be little downside. Will check
 VOD – sound interesting.   


 (Disclosure: I have AAPL
and recently acquired small positions in each of GLW and NOV).

Jaishal Kotak said...

Any suggestions on Canadian companies?

Tsachy Mishal said...

I mainly focus on US companies.

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[...] Cyclical stocks look cheap versus defensives – Capital Observer [...]