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.