stocks looking ahead

Is the Climate Right for Value Stocks?

Pretty much every year, you can count on the stock market pontificators to tell you that this is the year… the climate is finally right for the so-called value stocks to come around. 

 

by Briton Ryle

I bought a 1976 Corvette this weekend.

It’s not what you think. My son asked if we could do a restoration project, and a Corvette is his dream car — ’67s and ’69s though.

Thing is… you don’t find those choice years as restoration projects, at least not for the $2,200 I got this 1976 model for.

Fugazi frontman Ian MacKaye says he’s a patient man. I am not. I swore 20 years ago I would never work on a car again, and now I’ve got a huge restoration project on my hands.

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The interior is… how should I say this… sparse? Two seats, a steering wheel, a parking brake, and a gear shift. That’s about it.

The things we do for love.

Mike, the guy who accepted my pretty serious low-ball offer, says he bought it at an estate sale. Apparently, the former owner died before he could fulfill his dream of turning it into a dragster.

Seems like a wingnut dream to me, but this is America, and we are all partially batshit crazy in that we all have, um, aspirations. Impossible, never happen, must be crazy — but then a farmboy becomes president or an orphan becomes a tech billionaire and whaddya know? Those crazy dreams gain a little foothold in reality.

In any event, this car isn’t going to make it to dragster status. If it makes it to “pretty good,” I know I’ll be satisfied.

Value Stocks

I have a pretty good understanding of what value is. Pretty much every year, you can count on the stock market pontificators to tell you that this is the year… the climate is finally right for the so-called value stocks to come around.

Only it never is.

For at least 20 years, value investors have clung to their dream that investors will finally reward those stable, low-debt, low growth companies with higher stock prices. But those 1976 Corvettes will never be ‘67s or ‘69s. They probably won’t even become dragsters — though that won’t stop some rockstar CEO from coming in and spinning the yarn that he can turn JCPenney into Amazon.

The last time the sun shone on value stocks was probably the mid-1990s. The U.S. economy was emerging from stagflation. Interest rates were still high. It was expensive to borrow to fund growth, so a stable growth company had value.

I look at the trajectory of interest rates in terms of competition. In the 1970s and ’80s, borrowing and lending just wasn’t a very good business, because you couldn’t make a lot of money doing either. The growth you need to justify a loan at 10% just wasn’t there.

The internet, the fall of the Soviet Union, the S&L crisis, and the emergence of China changed the calculus.

In the aftermath of the S&L crisis, hundreds of billions in assets changed hands for pennies on the dollar. New owners had equity against which they could borrow. Failed banks were grist for the mega-bank mill to make those loans. New end markets in Eastern Europe and China added scope to the global economy, and then the internet connected it all.

Of course, I’m glossing over some things with that sweeping panorama I just painted. I don’t have the patience for still-life studies. And I’m not going to tell you that value investing is dead (because that would surely mean value investing makes a stunning comeback).

But I will tell you that the whole point of investing is growth. Money goes where it’s treated best. I will also tell you that the destination for an investment — be it a company, a project, etc — will, in part, define itself by the money it can attract.

Follow the Money

The whole oil versus renewable energy(NYSEARCA:XLE) dynamic is one of my favorite examples of this symbiotic relationship.

Oil demand is expected to be relatively steady over the next decade, and people will still buy cars. But do you wanna buy stock in Ford or ExxonMobil?

Warren Buffett would rather buy solar(NYSEARCA:TAN) or wind (NYSEARCA:FAN) farms than oil (NYSEARCA:USO)wells for a very simple reason: return on investment (ROI).

From the Model T to the Mustang, was there ever a company that said “America!” more than Ford? America was making money and going places fast and in style.

We’re still going places fast and in style. Just maybe not in Fords so much.

And now would be a good time to point out that I did just buy a 45-year-old Chevrolet. Maybe even add a, “What’s the ROI on that, chief?” To which I answer: That is an investment in my relationship with my son — should be a pretty good return.

Money is cheap these days, and it is finding a return in places like renewables, the cloud, 5G, and electric vehicles. Pay attention to companies that are transforming old-school businesses by bringing them to the cloud, using AI and other things to cut costs and increase that ROI.

And like Amazon dominates retail, there are future leaders out there right now, companies whose value can rise tenfold over the next decade. ROI, baby: the name of the game.