Value Or Growth?

                                                                          
Recent Real Money Columns on the Subject:
That age old argument raised its head around Chez Melvin yesterday. Do I buy the best or the worst stocks? Do I want the high PE stocks that everyone talks about or the low PE stocks? Do I want to own the most exciting companies with sext new products or stocks of which none of us have ever heard? Which works better, value or momentum. I have addressed in this past and better minds than mine have also tackled the subject. The research section at LSV  Asset Management’s website (www.lsvasset.com/research/research)  is full of scholarly articles on the  subject. Well known super quant invest Cliff Asness has done some spectacular work on the value versus momentum conundrum available on his website at www.aqr.com.


Both of these approaches work and have worked over long periods of time. I am of the optinion that if you tell me about your personality, goals and the time frame in which you chose to operate I can probably tell you which school of though you should favor. If I know you and your approach to life I can probably tell you which type of stocks on which to focus on your trading and research effort. The argument comes up so often and value and momentum types tend to argue about the topic like Red Sox and Yankees in a tight pennant race I thought I would share my definitive thoughts on the subject.


If your time frame is one month or less you really are not an investor, you are a trader. Fundamentals like earnings, sales and profit margins do not matter so much for you. You need to be aware that in this time frame market direction is a huge factor in the stock selection process. Trading individual stocks in this time frame is simply trying to gain some excess return above and beyond the stock market. If you are bullish of the market in general you want stocks that will rise a little farther than the indexes. If you are bearish you want stocks that will fall a little farther than the market. If I were trading this time frame right now and was bullish my trading universe would contain names like Apple (AAPL), Google (GOOG) and Cisco (CSCO) that were near or at new highs and had strong momentum. If I was bearish I would be looking to short stocks like Alliant Techsystems (ATK), Baker Hughes (BHI), or Ancestry.Com (ACOM) that are flirting with new lows and lagging the market in general.


If I am trading from the long side in the 1 to six month time frame I am a pure momentum guy.  I want stocks that have strong price momentum, earnings momentum, improving margins, exciting new products and a sexy story. I am looking for stocks that have super strong fundamentals and I do not care what price I pay for these gems. They need to be growing and growing fast. I want institutions to be net buyers of the shares as I need their buying pressure to push my stocks higher over my time frame. I am looking for stocks that are at or near short term highs in price as well. My trading universe contains names like LuluLemon (LULU), Coinstar (CSTR), Under Armor (UA) and Chipotle.  I want great companies with strong price momentum. If the fundamentals start to slip or the price rolls over, I am out of the stock. In this time frame I am just surfing the sweet spot.


If I am bearish I look for the opposite.  I want to short stocks with horrid fundamentals and a lagging stock price. My universe would probably include stocks like Lexmark (LXK), Sony (SNE) or even Skechers (SKX). I want to find stocks with poor fundamental and prices that are weakening. When trading in this time frame you want to keep in mind that predicting the direction of the stock market is still very much part of your decision. Determining market direction correctly will be a large component of overall return.


Successful practitioners of this approach tell that occasionally they get a stock in their portfolio that stay in buy mode for an extended period of time. Fundamentals keep improving and the stock keeps showing positive price momentum. Stocks like Apple and Priceline (PCLN) might be an example of one of these stocks. They can be tremendous wealth builders but my friends tell me that they are always long (or short) all of their stocks, including the big winners, from last night. The fundamentals need to keep improving (deteriorating) each quarter and the price needs to continue showing strength (weakness) measured against the broader market.


As we move out in our time frame into the 6 to 12 months segment of the markets I think we need to change our approach somewhat. In this time frame momentum is still very important but valuation starts to become more of a factor. The problem with super high momentum stocks is that when the mo-mo stops it gets ugly quick for those stocks with high valuation multiples. If I am looking at a longer holding period I want to consider adding value to my momentum approach. I am still surfing but I am surfing using stocks with solid fundamentals and lower valuations that are less likely to collapse if the market stumbles along my journey. I want to look for value stocks that have started to improve and the market is noticing or growth stocks with lower PEG ratios that have not risen to unstable heights.


When I started in this business in the age of Quotrons , ticker tapes and paper stock guides the one to two year neighborhood was just about everyone lived. Investors bought stocks and started thinking about selling after the one year capital gains period was reached. For right or wrong this was the most common holding period for the investors I met and worked with in the good old days. Even mutual funds were sensitive about turnover and taxes back in the olden days. Very few people live in this area anymore as most of the focus has become short term in nature.


The absence of heavy competition makes this a pretty fertile area in my opinion. If this was primary time frame I would be looking for fallen angels, turnarounds and undiscovered growth stocks exclusively. The approach of buying Value Line Stocks ranked 1 or 2 priced under $10 works very well. These are stocks that have fallen out of favor with Wall Street and the rankings are indicating some signs of a turnaround. Right now stocks like JetBlue (JBLU), Micron Technology (MU) make the list as turnaround stories that could easily rise by 50% or more over a 12 to 24 month time frame in my opinion. I also think undiscovered growth stocks with low institutional ownership like Eastern (EML) and Orchard Tissue (TIS) work very well in this time frame.


Crash buying of blue chips is in this time frame as well. When everything goes to hell and no one is buying stocks the one to two year investor should be buying with both hands. Wall Street is the only place where the 100 year statistical storm hits every three or four years. When it looks as though the world is going to end and the commentators on the financial networks look hung-over in the morning, buy the big names like Disney (DIS), Johnson and Johnson (JNJ) and Microsoft (MSFT) with the idea of selling them when the sun comes out on Wall Street once again.


When you move out over two years you are now in my neighborhood. This is the neighborhood of owners. It does matter if we own 100 shares or a million we think or ourselves as owners of the underlying business. I look to buy attractive assets at fire sale prices and own them until the full value is realized. I kick over rocks looking to buy companies in a good business at desperate prices. I am also looking to be the buyer of last resort in distressed situations where panic and fear is in the air. I have no stop loss or exit strategy when I buy a stock. In most cases I will own it until something changes for the worst and I think that any hope of the comonay being fixed is gone, the company fails, the company is taken over or is discovered by Wall Street and valuations soar to what I consider to be overvalued prices. I focus on safe and cheap and with an occasional venture into longshots with a risks and rewards highly skewed in my favor. I do not care how long I own a stock. I am very comfortable owning a company for five years but I am not upset when one gets taken over at a premium a year or two in either. I want to buy extremely cheap and sell extremely dear and time is not that much of a factor.


There is no sense to arguing value versus momentum. They both work. The discussion needs to be about time frame, desired outcomes and personality.

Just a Baseball

                                                                                                   
In the top drawer of my dresser there is a baseball. I have no idea where this particular baseball came from and there is nothing really special about it. It has the look of a stadium or fast food giveaway ball as it has both the Orioles Logo and Bank of America stamped on it. I’m pretty sure my stepdaughter gave it to me but I could be mistaken. It is just a baseball. It is a regulation ball made by Rawlings. It has a cowhide cover over a cork center weighing about 5 ounces. It is 9 inches in circumference and has 108 red double stiches holding it all together. The baseball has never been winged around the diamond or smacked off the outfield fence by an enthusiastic bat. There are no scars or scuffs on my baseball. It is just a baseball that lives in my dresser drawer.

Sometimes, like now, I take my baseball out. I grip it like a pitcher and try recreating the grip for a fastball or the curveball I could never throw. I even grip it like a knuckleball and toss the ball up for a bit to see if I can get the motion correct. I flip the ball into the air and catch it and just generally goof around with my baseball. I have always loved the fell and the look of a new baseball. Sometimes I take that baseball out and just toss it up and down while I am working and that baseball and I go drifting back.

We drift back to a dusty filed in the Eastport section of Annapolis. It is nine in the morning on a summer day and already groups of boys are gathering in that field. It’s a grubby collection of boys ranging from 8 to maybe 12 years of age. They are wearing whatever jeans were on sale on Britts Department store, JC Penney or Sears. There are no cleats or fancy shoe wear and PF flyers and Ked’s rule the day on our little field of dreams. I am there with my dirty old glove and trusty bat. I am enthusiastic about the game and love playing it. I am not very good at this game but I do love it so. I can’t hit for shit although since I am ambidextrous I am equally awful from both sides of the plate. If I get a pitch right in the sweet spot of my swing when batting left handed I can drive a ball a little ways so no one ever throws it there.  On the rare occasion I pitch the game turns into home run derby time. I can play the field without embarrassing myself and I’m pretty fast for a little guy so I am not a total liability. We will be in that field until dark if our parents let us.

On  days when there were not enough kids to get up a game a few of us would grab the Wiffle Ball gear and head for the back of the Harbor House Apartments. Off the wall was a home run and only one kid could hit it. He hit it every time he came up to bat. Needless to say that kid was not me. None the less we played until the folks down the third base line had to be sick of the sound of a plastic ball whapping off the sliding glass doors and little boys arguing strikes and foul balls.  When there was no bigger game in the filed we were behind the projects playing a version of baseball with rules and quirks know only to us.

The feel of that ball in my hands with fingers properly aligned for my lightning fast 25 mile an hour fastball and I can recall as if it was yesterday being in the back yard with a pitch back net. The net was stretched on an aluminum frame with springs and had a strike zone stitched in the middle. When no one else was around, or far more likely I was grounded for some nefarious crime against parenthood, I would spend hour upon hours pitching to that machine and chasing down the returns. I was Palmer, Ford, Gibson or McNally on the release and Brooks, Belanger and Mantle on the return. I have no idea what my mother spent on that damn thing but it was the best deal she ever got on a toy.

Tossing my pristine baseball gently into the air watching the spin of the seams through the air and I am carried back to my basement room in the house on Boucher Avenue. I can almost feel those little white plastic earplugs on my highly prized hand held transistor radio. I would lay on the bed and listen to Chuck Thompson call the game aided by legendary stadium announcer Rex Barney. Those earplugs drowned out the sounds of a marriage that never should have happened coming to its harsh ending over a period of a couple of years. The sounds of the Orioles whipping the snot shit out of the Tigers, the Yankees, and the hated Boston Red Sox frowned out the yelling, the tight voiced arguments and occasional breaking of dishes or whatever else Mom chose to wing at her husband that night. Listening to the White Sox, The Indians, The Angels and The A’s go down in ignoble defeat could help you forget your sister was in the hospital with yet another asthma attack. You could escape it all as Buford , Blair, Robinson F, Boog, Robinson B, Johnson, Etchebarren/Hendricks, and Belanger used superior fielding skills and fierce bats to smote the evil opposition. Palmer, McNally and Cuellar befuddled and dispatched the opposing batters and Eddie Watt would close it out of they got tired from tossing all those strikeouts. I wasn’t supposed to stay up listening to those games but my mother let me have my little escape from it all and at some point during the night she would take those plugs out of my sleeping ears and place that little radio on the dresser. That radio had the most amazing batteries too. I had it for years and the batteries always worked and never needed changing. One suspects Mom had something to do with that as well.

As I recreate the motion of throwing across the diamond to nip the runner at first with my baseball I can remember the first time I went to a game. My friend Billy’s dad took us and no supplicant ever approached the altar of St Peters in Rome with the reverence and awe which I entered Memorial Stadium for the first time. The grass was breathtakingly green and the stark white of the baselines is etched in my mind still. Right there on the field in front of us were the Gods, legends and heroes of my youth. Andy Etchebarren hit a home run and Palmer outdueled Louis Tiant for the win against the Indians and I do not think my feet touched the ground for a month.

My baseball and I can fast forward too. We can go all the way up to 1983 to the one and only baseball game my father and I ever went to together. We were estranged for many years and not reunited until I was in my late teens. My own travels and misadventure kept us apart for several years as well but I was back from my travels and misadventures and living in Baltimore. Dad was pretty sick by then and didn’t get around so good but he scored tickets to a game that season of Orioles Magic. We sat in the first row of the upper deck and watched the Orioles come from behind in the bottom of the ninth with six straight singles to win the game. It was the only baseball game I ever went to with my dad and I still remember it well.

A few months later as Cal Ripken caught the last out to vanquish the Phillies and win the World Series I reached for the phone to celebrate with my Dad. He didn’t answer and my joy of the victory was tempered by the fact that he never would again. He had died just a few weeks earlier and we would never go to another game or talk baseball while catching a game on the television. But I have that one game and I will treasure it forever.

My baseball and I like to visit 1984 as well. My daughter was born of May of 1984 and a more unprepared scared shitless,”what the fuck to do I do with this thing” father you have never seen. Fortunately there was a bus that stopped right outside my east Baltimore row house that dropped me right at the stadium. I packed that stroller up many times and just took her to the game, diaper bag in tow, to watch the Orioles. It was on such an adventure that I learned that no matter how exciting the game you cannot just give the baby more bottles in the heat and sun when she cries. Bad things happen when you do that and then pick the baby up after the game. The upside is that when you are covered in baby puke in the heat finding a seat on the bus is not much of a problem.

We can fast forward some more to the little league fields of Arnold Maryland watching my son play ball. He was so much better than I ever was and I loved watching him play. He was all legs and elbows but had the range and glove to play shortstop like a little Belanger. He could pitch a little too when called upon. He was a tad erratic. When he was on he was a strikeout machine. When he was off he hit every batter he faced. On the upside he rarely walked anyone. Tommy wasn’t a great hitter but he was far better than his father ever was at the plate. Eventually girls, video games and other distraction of the teenage years took him away from the game but my god I did love watching my son play baseball. In my mind’s eye I can still see his bony lanky form drifting over to snag a grounder at short and start the double play.

I made my daughter play softball one summer as well. She had a skill set a tad below her brothers. She couldn’t hit, was afraid to catch the ball and ran like a very slow turtle. But Lisa tried and even made a few plays and accidentally got a base hit once. The other girls on the team were incredibly supportive and I can still see her with her multicolored braces and early teen awkwardness in her Arnold Orioles uniform giving the game a try for dad’s sake. She declined the opportunity to play the next year.
My baseball sparks more recent memories as well.  I think about taking my wife and stepdaughter to a game right before we got married. Maeve still wasn’t too sure about this whole stepfather thing but she had a ball at the game and just maybe figured out that the whole thing wouldn’t be so bad after all. Anyway she stills has the bright orange oversized foam finger around here somewhere so it was not an entirely horrible experience. She and my wife have learned to tolerate my addiction to the worst baseball team in the American League East and try not to laugh too hard at me when I am watching the games during the summer.  I am pretty sure Maeve even gave me this baseball I sit spinning randomly in the air while sitting at my desk and  she made me the Baltimore Orioles Build a Bear that sits on the bookshelf. Perhaps I am not the most evil stepfather in the history of the world after all.

Tommy and I catch a game or two together every season these days as well when time allows. He is busy climbing the ladder of success out there in the world it is nice to slow things down for a bit on a sunny summer’s eve and head to Camden yards. It is a chance to knock back a couple of years and enjoy the bonds that baseball has built between fathers and sons over the decades.  Lisa comes along once in a while but she I suspect she doesn’t have the love of the game her brother and I do and is merely indulging us for the price of free beer. Erin and I have caught a game or two over the past two years, although again she is mostly indulging her strange little husband’s love of the silly damn game.

It is just baseball I keep in my dresser. Sometimes I take that baseball out and toss it around and grip it like the major league ballplayer I never was except in the backyard with my pitch back net. I think of the lessons of the game that have translated to my life. Practice often. Run out grounders. Don’t spit in the dugout. Always hit the cutoff man except when you a play at the plate. Watch for the signs. Sometimes a bunt is better than a home. Sometimes it’s not. Keep the ball in front of you. Know the pitch count, how many outs there are and what base the runners are on. Back up first.

As I grip that baseball I think of that little boy in torn dungarees and the amazing journey his life has turned out to be. I think of the people I love and the moments we have shared along the way. I recall the joys of being at a game with friends, enjoying a few beers and the greatest game in the history of the world (in my opinion anyway). I think of my kids and my wife who indulge my baseball addiction and all we still have to experience together as a family (including the Orioles World Series games we will be attending together very soon) and how blessed and lucky I am to have them in my life. As I watch my little baseball roll across the desk after my latest error I think of all the magic of life and the pure joy that being alive can bring.

It just a baseball I keep in my dresser drawer. There is nothing special about it at all.

 I think I’ll keep it.

Leprechauns and Businessmen

                                                                                   

Saint Patrick’s Day once more is upon us. It is time for the annual Wearin O The Green and beating of the Liver. It is a day when normal people try to drink like me with all the usual unfortunate social consequences. There is no better people watching experience than a bar stool on the 17thof March. The metamorphosis that causal drinkers experience during the day is fascinating to watch. They go from normal fun loving folks to wretched drunken zombies staggering around the bar losing friends and acquiring instant partners at a sometimes stunning pace. As bad versions of Irish classics are pounded out by a less than sober bar band your average St Pats pub goer shall swing from dancing on tables to crying over the permanent loss of 15 minute old friendships. The green beer shall pour freely and eventually be puked in an even freerer fashion. Tis a Grand Old Time Indeed. Naturally I shall be out And about again this year to take in the festivities. The Plan calls for heading to the Stil in Timonium. See you there and if you are not a big drinker bring your own puke bag and attorney. Odds favor needing one or both by nights end.

Unfortunately we are still progressing deeper into election season. The level of partisan politics that I am seeing on both sides of the aisle is a source of dismay. People of both persuasions just seem willing to accept what they are told by their party leaders in the form of TV commercials and sound bites. I really do not think that anyone reads what their chosen candidates or elected officials actually believe or do. If they did we would not have Barak Obama as a President and Rick Santorum would not be a viable candidate for any elected office anywhere, much less President. Politics have gotten dumber since campaigns started being televised and we the people appear to have stopped thinking for ourselves.  I see people on both sides blindly parroting the party line and it scares the hell out of me that they never for one second stopped to think of just how truly stupid the bulk of these ideas actually are in the harsh light of reality.

You can blame lots of people for this sad state of affairs. You can blame the politicians and their handlers for creating all the slick ads. You can blame the media for their sound bites and their bias for one side or another. Why don’t we just blame the ones really at fault? Look in the damn mirror. It is us and our apathy that is to blame to the current political situation and chaos. We voted for these idiots based on 30 second commercials and one minute sound bites. We cast our precious votes without ever investigating these peoples history, voting records or reading their speeches or position papers to garner so much as a fucking clue what they really believe . We are more worried about the sex lives and peccadillos of our candidates that their ideas on the economy, the tax code, foreign affairs not involving Brazilian supermodels, education or energy. Our government is pathetic because our people (that’s us folks) are overly apathetic.

One of my favorite memes these days is that it all the big bad business peoples fault. It is true that the big Wall Street Banks behaved badly leading up to the credit crisis but do you seriously think they did that in a vacuum? It was the government, boys and girls led by that champion of liberal theology Barney Frank, who pushed to extend homeownership to all regardless of circumstance. He and those who voted with him are largely responsible for the wild expansion of what used to be a tiny subset of the mortgage market called subprime. If pension funds and other large investors were not such yield whores in an a attempt to make up for overly optimistic assumptions no one would have ever bought those pieces of shit paper Wall Street pushed out the door. Anyone who ever read a prospectus or took the time to learn the structure of these deals would have never put their own or anyone else’s money into them. I can remember reading  Frank Fabozzis excellent book on fixed income and mortgage backed securities back in the 1990s and concluding that anyone who ever bought a derivative of mortgage backed securities should have their head examined. This was well before they even invented the more toxic offspring’s of mortgage backed securities that almost blew up the world. A little thought along the lines of this person cannot afford to buy a home now, or I do not understand this bond so I am not buying it and the credit crisis would have died before it could be born.

All of that activity was the big banks and financial institutions but the brush of blame and same has extended to all business people and that’s just foolish. I just love it when someone wearing Nike’s and J. Crew attire tightly clutching their IPad and IPhone that is hooked up to Verizon or ATT wireless lectures me on the evils of business. The truth of the matter is that for the most part businesses make your life better and their desire to make a profit actually benefits you. Apple did not become the largest company by market cap because they are soft fuzzy people who want to buy the world a coke. They are creative, ruthless business people who want to make products you will buy and allow them to dominate the marketplace. Oil companies are not the evil empire they just want to find oil and natural gas and process the stuff into products they can sell you to run your car and warm your home.  The bank on the corner just wants to take in deposits and make loans at a profit. They are quite content to let Goldman Sachs, Bank of America and Citigroup have the franchise on fucking up the world.

Harvard Business School just did a survey of 10,000 graduates on the outlook for America and our competitive state in the world. The survey is available at www.hbs.edu and you should take the time to read it as it is very enlightening. What I want to focus on is the business leader’s suggestion to improve our condition. You would expect these greedy evil bastards to say just throw out all regulation and do away with taxes and it will all be fine. They didn’t. Most of them didn’t even say lower taxes. They said simplify the tax code. They want a more sensible immigration policy to do away with the underground economy and expand the pool of legal consumers and workers. They want to see the erosion of the quality of the US Education system stopped and reversed. One might suggest that less spending on bureaucracy and a focus on the classroom might help here. The want to see government fill its proper role and improve the logistical (highways, airports and such) and communication (broadband, fiber and wire) infrastructure. They want to see the regulatory environment reviewed so they make sense for the country from a cost/benefit standpoint. Big, bad evil business just wants a level playing field that makes sense so they can make the products you use every day of your life and provide jobs. Those evil fucking bastards!

Those of you who think business is pure evil and lack compassion should take a few minute to read. Specifically read the donor list of all the major hospitals and universities in this country. Study who sponsors the symphony halls and opera companies across our nation.  Who is paying for most of those programs on NPR and public television? Whose name is on those little league shirts  and soccer jerseys as the team sponsor paying for the equipment and uniforms? Businesses.

I have some more news for those of you who think so policy wonk in Washington has the answer to our countries problems. You are dead wrong. The answer lies in four kids in a garage messing around with computer chips. The answer lies in a lab where someone is working on a way to burn our abundant coal supply in a cleaner more efficient manner, to lower energy costs. It is in an engineering office where some geeks are working to convert autos and trucks to natural gas on a widespread basis that makes economic sense. The answer is a farmer who is sitting at his kitchen table figuring out how to grow more food cheaper thereby increasing his profits and lowering your food costs. The answer to our economic problems comes from the business community not from government buildings, union halls or think tanks.

The real solution to all our problems comes from we, the voter. We, the voters, need to tell the people who run for office that we do not care so much who sleep with who or who wants to get married. We, the voters, need to tell government to do what they are supposed to do and no more. We, the voters, need to insist on a simplified tax code. We, the voters, need to insist that out government quit deploying troops to solve the world’s problems and not commit so much as one solider, sailor or marine without a declaration of war. We, the voters, need to quit asking our politicians for the solution to our individual problems and desires and ask only that they offer us the conditions to succeed (or fail) on our own merits. We, the voter, need to understand that if we elect idiots we get idiotic government.

We, the people, need to stop accepting sound bite politics. We the people need to take care of the disadvantaged in our community and quit asking the government to do the job. We the people need to stop being so damn narrow minded and judgmental. We, the people. need to stop insisting everyone else look, think and act like us. We, the people, need to embrace the outdated ancient concept of personal responsibility. We, the people, need to once again act like American and not chickenshits who can’t wipe their own ass without government assistance and instructions.

Now Saint Patrick’s Day is upon us. Like a good American consumer I am off to the bar owned by a business man who shall sell me intoxicating beverages at a fair price in an effort to earn a fair profit.