While we have stepped back from the meme stock craziness of 2021, US stocks remain quite expensive by historical standards, with our Cyclically Adjusted Price to Earnings (CAPE) ratio at almost twice its long-run average:
Even at a high price, US stocks could still be worth it, and I certainly hold plenty. But I also think it it a good time to consider the alternatives. US Treasury bond yields are the highest they’ve been since 2007. But there are also many countries where stocks are dramatically cheaper than the US- and not just high-risk basket-cases, but stable “investable” countries.
There are several reasonable ways to measure what counts as “expensive” for stocks in addition to the CAPE ratio I mention above. The Idea Farm averages out four such measures to determine how expensive different “investable” (large, stable) country stock markets are. Here is their latest update:
You can see that US stocks are expensive not only relative to our own history, but also relative to other countries, lagging only India and Denmark. That means that much of the world looks like a relative bargain, with the cheapest countries being Colombia, Poland, Chile, Czech Republic, and Brazil.
Of course, sometimes stocks, just like regular goods and services, are cheap for a reason: they just aren’t that good. They might be cheap because investors expect slow growth, or a recession, or political risk. But if you don’t share these expectations about a cheap stock (or country), that’s when to really take a look. I certainly did well buying Poland after I saw they were the cheapest in last year’s global valuation update and thought there was no good reason for them to stay that cheap.
I like that the chart above provides a simple ranking of investable markets. But if you wish it included more valuation measures, or small frontier markets, you can find that from Aswath Damodaran here. Some day I hope to provide a data-based, rather than vibes-based, analysis of which countries are “cheap/expensive for a reason” vs “cheap/expensive for no good reason”, featuring measures like industry composition, population growth, predictors of economic growth, and economic freedom. For now you just get my uninformed impression that Poland and Colombia seem like fine countries to me.
Disclosure: I’m long stocks or indices in several countries mentioned, including EPOL, FRDM, PBR.A, CIB, and SMIN. Not investment advice.
A stopped clock is occasionally right. And so are perma-bears, those commentators or analysts who continually predict that GDP and stocks will plunge – perhaps in the next quarter, but more often say six months from now. (And that deadline keeps getting pushed back every six months).
When I was first getting started investing, I was overly influenced by these seemingly cautious and sober souls, and I consequently lost out considerably compared to my colleagues who blithely stayed fully invested. So I hold my native pessimism in check when investing, and stay mainly in the market, but with a little cash in reserve just in case The Big One hits.
All that said, I do try to sample various points of view. If I have been mainly seeing positive chatter, I turn to my favorite perma-bear, an analyst named Jeffrey Snider. His YouTube channel is called Eurodollar University, and he runs a subscription service as well.
Jeff seems like a genuinely nice guy, who believes that his dire readings of the macroeconomic tea leaves are helping folks avoid disaster. His demeanor is more like an earnest teacher, not a huckster trying to sell something. I should add that he offers meaningful insights on the Eurodollar scene, which is globally significant and which most analysts do not understand or even recognize.
But Jeff’s bias is nearly always toward the negative, and it is something of a good-natured joke among his viewers. Typical comments: “ The market can remain irrational longer than Jeff can stay pessimistic” and “Jeff is the best on Youtube. I watch his videos every night right before I go to bed. In less than 5 minutes, I’m in a semi-conscious coma. Its better than any sleeping pill. That smooth soothing voice extoling the virtues of a collapsing economy works wonders. A++”.
Well, what is the bear-meister saying now? He claims that the seemingly red-hot employment numbers that have been reported in recent months are less hot than they appear. I will paste in a few snips from his recent YouTube, It Just Happened…The JOB MARKET JUST BROKE!! .
One point he makes is that there has been a persistent, inaccurate bias to the upside in the payroll numbers reported by the BLS. These big numbers are what gets reported; what does not get reported so much is, month after month, these monster payroll increases are quietly revised downwards, often by substantial amounts:
Even with the adjustments, these still seem like large increases in employment. Undaunted, Jeff pokes holes in the hot labor market scenario by claiming that full time employment is actually stagnant; it is the rise in part-time workers that creates the seemingly large army of the newly employed. The fact that total hours worked has plateaued seems to support his case here:
Another factor is worker hoarding. Employers were so burned trying to scramble for workers during the 2022 reopening-from-Covid that they are keeping their workers on payroll (even part-time), just in case the economy picks up and they need to pull them in full-time. A case in point is manufacturing. New orders are down considerably this year, and headed even lower, yet manufacturers have not cut their workforces appreciably:
If orders stay low for a long enough time, however, the manufacturers will have no choice but to start massive layoffs.
As another indicator of labor market softness, temporary workers may be a leading indicator of employment trends. They are not such a core part of a company, so there is less hoarding of them. And temporary help services have been in a steady decline this year, which is consistent with a cooler economy:
Sell Everything??
As I said, it is worth considering all sides. I think the specific points mentioned above are all valid ones. I would add that if students actually start payments on all those loans which taxpayers and the Fed have subsidized for the past three years, that will finally put a crimp in the spending. Also, the surprise downgrade of U.S. federal debt by the Fitch rating agency , and resulting jump in interest rates, has finally gotten people talking about out-of-control government spending, for one week anyway. Also, the great China-reopening that was supposed to jump-start the global economy seems to be pretty flat.
However, a couple of counter-points to the bearish narrative:
First, even if manufacturing is rolling over, in the U.S. it is fairly small relative to services. At least in some geographical areas, my anecdotal reports say that it is still a challenge to get good workers to do services.
Second, the tidal wave of cash from pandemic giveaways that washed into our collective bank accounts is still not depleted. Consumer confidence is high, and we are spending freely. This economy is a big, big ship, and it is still steaming full ahead, brushing aside high interest rates and yield curve inversions. The recession seems to continually recede. There will inevitably be a downturn someday, of course, but absent some geopolitical event, I think it may take some time for it to arrive.
And finally, even if the long-awaited recession does arrive, it may not necessarily be so bad for stocks. Since the 2008-2009 Great Financial Crisis, the Fed has taken a very active role in supporting the markets. Wall Street has been conditioned to expect the Fed to flood the system with money if a serious downturn occurs. Also, the Street is betting that there will be enough howls of pain over the high interest being paid on the federal debt that unbearable pressure will be brought on the Fed to loosen up; the vaunted independence of that institution will be put to the test, with Congressional threats to alter their charter if they don’t cave to pressure. And so, “[economic] bad news is [investing] good news”, in contrast to the pre-2008 world. Furthermore, federal deficit spending ramps up during recessions, and as noted in The Kalecki Profit Equation: Why Government Deficit Spending (Typically) MUST Boost Corporate Earnings , this deficit spending tends to boost earnings.
And so even if Jeff Snider is correct that the economy is rolling over and will soon slide downward, this may not give investors a very useful signal. As another one of his YouTube viewers has commented, “This channel is a masterclass in learning that knowledge about the macro environment does not provide an edge in markets.”
90 plus per cent of people, they spend all their time on the buy decision and then they figure it out as they go along on when to sell and we say that’s crazy. You need to establish sell criteria, even if it’s just rebalance, even if it’s a trailing stop, whatever it may be on all your public market positions, because otherwise it gets emotional and that creates huge problems.
Last week I explained why I buy individual stocks. This week I’ll share how I think about when to sell individual stocks, as I go through my portfolio and decide what to hold and what to sell. This is the first time I’m doing this exercise, though I should have done it long ago; until now I’ve unfortunately been on the wrong side of the above Meb Faber quote.
I actually think that most people are correct not to put much thought into what to sell, because I still agree with Buffett and most economists that most people should just buy and hold diversified index funds. Thinking about selling too much might lead people to sell everything whenever they get worried, sit in cash, and miss out on years of gains. But the important truth in Faber’s point is that if you are buying stocks or active funds for any reason other than “its a great company/idea that I’d like to hold indefinitely”, it makes sense to put as much thought into when/whether to sell as when/whether to buy.
People buy stocks all the time based on short-term arguments like “this banking crisis is overblown”, or “I think the Fed is about to cut rates”, or “this IPO is going to pop”, or “I think the company will beat earnings expectations this quarter”. These might be good or bad arguments to buy but they are all arguments about why it makes sense to hold a certain stock for weeks or months, not for years or indefinitely.
But people often buy a stock for short-term reasons like these, then hold on to it long term- either out of inertia, or because they grow attached to it, or because it lost money and they want to hold until it “makes it back” (sunk cost fallacy). None of these reasons really make sense; they might work out because buying and holding often does, but at that point you might as well be in index funds. If you’re going to be actively trading based on ideas, it makes sense to sell once you know whether your idea worked or not (e.g., did the company you thought would beat earnings actually do it) to free up capital for the next idea (unless you genuinely have a good new idea about the same stock, or you think it makes sense to hold onto it a full year to hit long-term capital gains tax). Its also always fair to fight status quo bias and ask “would I buy this today if I didn’t already own it?” (especially if its in a non-taxable account).
Maybe this is obvious to you all, and writing it out it sounds obvious to me, but until now I haven’t actually done this. For instance, I bought Coinbase stock at their IPO because I thought it would trade up given the then-ongoing crypto / meme stock mania. I was correct in that the $250 IPO started trading over $300 immediately; but then I just held on for years while it fell, fell, fell to below $100. The key difference I’m trying to get at here is the one between ideas and execution: its not that I thought Coinbase had such good fundamentals that it was a good long term buy at $250 and my idea was wrong; instead I had a correct short-term idea of what would happen after the IPO, but incorrectly executed it as if it were a long-term idea (mostly through inertia, not paying attention, and not putting in an immediate limit sell order at a target price after buying).
So if you buy stocks for short- or medium-term reasons, it makes sense to periodically think about which to sell. I’ll show how I I think about this by going through some examples from my own current portfolio below (after the jump because I think the general point above is much more important that my thinking on any specific stock, which by the way is definitely not investment advice):
The conventional wisdom among economists is that large, liquid asset markets like the US stock market are incredibly informationally efficient. The Efficient Market Hypothesis (EMH) means that these markets near-instantly incorporate all publicly available information, making future prices essentially impossible to predict (a random walk with drift). As a result, economists’ investment advice is that you shouldn’t try to beat the market, because its impossible except through luck; instead you should aim to tie the market by owning most all of it via diversified low-fee index funds (e.g. SPY or VT).
This idea usually sounds crazy when people first hear it, but it works surprisingly well. You’d think that at least half of participants would beat the market average each year, but active strategies can generate such high fees that its actually much less than that. Further, people who beat the market one year aren’t more likely than average to beat it the next, suggesting that their winning year was luck rather than skill. Even Warren Buffet, who economists will sometimes concede is an exception to this rule, thinks that it is best for the vast majority of people to behave as if the EMH is true:
In 2008, Warren Buffett issued a challenge to the hedge fund industry, which in his view charged exorbitant fees that the funds’ performances couldn’t justify. Protégé Partners LLC accepted, and the two parties placed a million-dollar bet.
Buffett has won the bet, Ted Seides wrote in a Bloomberg op-ed in May. The Protégé co-founder, who left in the fund in 2015, conceded defeat ahead of the contest’s scheduled wrap-up on December 31, 2017, writing, “for all intents and purposes, the game is over. I lost.”
Buffett’s ultimately successful contention was that, including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over 10 years. The bet pit two basic investing philosophies against each other: passive and active investing.
This has been the approach I’ve taken for most of my life, but over the last 3 years I’ve gone from ~99% believing in efficient markets to perhaps ~80%. Missing on crypto felt forgivable, since it was so new and unusual; I recognized that in the early days of a small, illiquid market the EMH might not apply, I just misjudged what counted as “early days” (I figured that by 2011 “everyone” knew about it because Bitcoin had been discussed on Econtalk; its up ~1000x since).
But with the Covid era the anomalies just kept piling up. All through February 2020, the smart people on Twitter were increasingly convincing me that this would be a huge pandemic; the main thing reassuring me was that stocks were up. But by late February they finally started crashing; instead of trusting the markets, I apparently should have trusted my own judgement and bought puts. Then investors starting buying the “wrong” Zoom instead of the one whose business benefitted from Covid:
Then we saw “meme stock mania” with many stocks spiking for reasons clearly unconnected with their fundamental value. Many at Wall Street Bets were clear that they were buying not because of business fundamentals, or even because they thought the price would go up, but because they liked the company, or wanted to be part of a movement, or wanted to send a message, or “own the shorts”.
Anecdotes got me to start taking some of the anti-EMH economics literature more seriously. For instance, Robert Shiller’s work showing that while it might be near-impossible to predict what a single stock will do tomorrow better than chance, predicting what the overall market will do over the longer run is often possible.
By revealed preference, is still mostly buy the EMH. About 80% of my net worth (not counting my home) is in diversified low-fee index funds. But that means 20% isn’t; its in individual stocks or actively traded ETFs with more-than-minimal fees. Why do this? I see 4 reasons buying individual stocks isn’t crazy:
Free trading: Buying a bunch of individual stocks used to incur huge fees. Now, many brokerages offer free trading. Even if the EMH is true, buying a bunch of individual stocks won’t lose me money on average, just time.
Still diversified: Buying into active funds instead of passive ones does tend to mean higher fees, and that is a real concern, but they do still tend to be quite diversified. Even buying individual stocks can leave you plenty diversified if you buy enough of them. Right now I hold about 45, with none representing more than 0.5% of my portfolio; one of them going bankrupt causes no problems. If anything I’m starting to feel over-diversified, and that I should concentrate more on my highest-conviction bets.
Learning: Given the above, even if the EMH is 100% true, my monetary losses due to fees and under-diversification will be tiny. The more significant cost is to my time- time spent paying attention to markets and trading. This is a real cost, enough that I think anyone who finds this stuff boring or unpleasant really should take the conventional econ advice of putting their money in a diversified low-fee index fund and forgetting about it. But I’m starting to find financial markets interesting, and I think keeping up with markets is a great way to learn about the real economy- they always suggest questions about why some companies, sectors, factors, or countries are outperforming others. In some EMH models, the return to trading isn’t zero, but instead is just high enough to compensate traders for their time. In this case, people who find markets interesting have a comparative advantage in trading.
Outperforming Through New Information: All but the strongest version of the EMH suggests that those with “private information” can outperform the market. Reading about the very top hedge funds I think they really are good rather than lucky, and the reason is that they have information that others don’t. Sometimes this is better models but often it is simply better data; Jim Simons got historical data on markets at a frequency that no one else had, and analyzed it with supercomputers no one else had. That’s a genuine information advantage, and I don’t think it’s a coincidence that he wound up with tens of billions of dollars. This should be incredibly encouraging to academics. We can’t all be Jim Simons (who was a math professor and codebreaker before starting Renaissance Technologies; Ed Thorpe was another math prof who got rich in markets), but discovering and creating private information is exactly what we do all day as researchers. My hard drive and my head are full of “private information” that others can’t trade on; of course right now most of it is about things like “how certificate of need laws affect self-employment” that have no obvious connection to asset prices, and there is a lot more competition from people trying to figure out markets than from people trying to figure out health economics. But discovering new information that no one else knows is not only possible, it is almost routine for academics, and its not crazy to think this can lead to outperforming the market.
Overall I think economists have gone a bit too far talking themselves and others out of the idea that they could possibly beat the market. I’ll discuss some more specific ideas in the next few weeks, but for now I leave you with 3 big ideas: you can’t win if you don’t try; winning is in fact possible; and if you are smart about it (avoid leverage, options, concentration) then defeat is not that costly.
Disclaimer: This is not investment advice.I say this both as a legal CYA, and because I don’t (yet?) have the track record to back up my big talk
I watched the Chapman Economic Forecast Update for 2023 live on June 22 (you can watch the whole thing free here). Go to their website for free videos and links. They have an excellent track record for being correct.
This time, Dr. Jim Doti believes we are headed for a recession by the third quarter of 2023 or at least what he conservatively calls a “slowdown”. He hates to make dramatic predictions or deliver bad news, but he saw the inflation brewing back in 2021, and I remember him correctly predicting what was to come.
For one thing, the dramatic growth in the money supply at the beginning of the pandemic has been corrected into a sharp contraction of the money supply.
People have been joking about how the recession isn’t happening.
The middle segment of the forecast, which I recommend watching, is about investing. Fadel Lawandy cautions that stocks are not a good bet right now, with a likely recession looming.
The third segment is focused on the economy of California. I didn’t finish that part, since I don’t live there anymore.
The Federal Reserve has been increasing interest rates at the fastest pace since the 1980’s, from near-zero rates in March of last year to over 5% today. This has led to rapid slowdowns in interest-rate sensitive sectors like housing, cars, and startups. Because most people finance their home buying, higher interest rates mean higher monthly payments for a house at a given price. Since many people were already buying houses near the highest monthly payment banks would allow them to, higher interest rates mean they need to buy cheaper houses or just stay out of the market and rent. This is especially true as the interest expense on mortgages has tripled in two years:
You’d think this would be bad news for homebuilders, and for most of 2022 markets agreed: homebuilder stocks fell 36% from the beginning of 2022 to September 2022 after the Fed started raising rates in March. But homebuilder stocks have recovered since September, with some major names like D.R. Horton and Lennar hitting all time highs. Why?
I bought homebuilder stocks in January but I have to say even I wasn’t expecting such a fast recovery (if I had, I would have bought a lot more). I was buying because they were cheap on a price to earnings basis and temporarily out of fashion; I love stocks that are priced like they’re in a secular decline to bankruptcy when its clear they are actually just having a bad cycle and will recover when it turns. But I thought I’d have to wait years for falling interest rates and a recovering housing market for this to happen. Instead these are up 20-100% in 6 months. Why?
The big thing I missed was that high interest rates have hit their competition harder, reducing supply as well as demand. Who is the competition for homebuilders? Existing homeowners. Homeowners with the “golden handcuffs” of a 3% mortgage who don’t want to move if it means switching to a 7% mortgage. I’m seeing this personally in Rhode Island- I’d kind of like a house with a bigger yard on a quieter street, but there are only 5 houses for sale in my whole school district. Between that and interest rates, we’re staying put. But for people who really need to move, new homes are making up a record proportion of the available inventory:
This situation seems likely to persist for at least months, and possibly years. The Fed paused its rate hikes yesterday for the first time since last March, but indicated that more hikes may lie ahead. I’m tempted to take the win and sell homebuilder stocks, but they still have price to earnings ratios under 10, and the “golden handcuffs” on their competition seem likely to stay on for at least another year.
Once upon a time I was enrolled in a project economics training workshop at a certain unnamed (but generally honest) S&P 500 company, taught by a finance guy from corporate. We got on the subject of making assumptions. The planner knew he was among fact-friendly engineers, not corporate toadies, so he unguardedly told us a story. He was part of a team of young up and coming managers who (as often happened at that stage in their career track) were thrown together in a planning role. They were tasked with coming up with a plan for the upcoming year for I think some large division of the company. They worked hard and put their most realistic assumptions into the plan, and found that, as a result of market shifts beyond our control, next year’s earnings were going to decline slightly.
When they presented this result to management, they were told, “No, go back and bring us a plan for how we are going to grow earnings by [say] 8% next year.” The quick-witted young planners got the message and went back and tweaked their assumptions until they got earnings to grow the required amount. They weren’t exactly lying, but they all knew their “plan” was not straight down the middle realistic. However, the managers were happy, and that was what mattered. Such is the corporate mindset. If analysts or planners want to succeed in their careers, they have to produce what is desired by the layers above.
Earnings “beats” are often pointless
According to FactSet, with the vast majority of S&P 500 companies having reported their first quarter (Q1 2023) earnings, 78% of them reported actual earnings per share (EPS) above the mean average of analysts’ estimates. So nearly 80% of companies “beat estimates”. Woo hoo! What a great quarter for earnings!
But… the actual S&P 500 earningsdeclined by 2.1% from the previous (actual) earnings. Hmm, maybe not such a great quarter after all. And this is on top of a decline in the previous quarter, as well. But nobody talks about that.
This is another example of the systematic bias in “earnings estimates”, which makes the quarterly hurrahs over “beating” estimates somewhat silly. We have complained about this earlier. Here is the problem: most published analysts are employed by investment banks or similar “sell-side” institutions which are always courting the favor of large companies, since they want the companies to do business with them. What sorts of earnings estimates do the corporate brass want to see?
Well, for earnings that are due to be reported a year or more in the future, they want to see high estimates, which would justify high stock prices now. And for earnings that are due to be reported in a few weeks, the managers want to see low estimates, which they can then (tah-dah!) “beat.” And so, we see a reliable pattern of analysts starting with unrealistically high estimates, and then ratcheting down, down, down in the year before the actual reporting date.
Bring on the charts
A recent article by Seeking Alpha author Lance Roberts illustrates some of these trends. I pulled a couple of his charts here. First, here is a plot showing the decline in Q1 2023 estimates over the past 18 months or so, as analysts do their usual dance:
The blue line in the figure below shows the percentage of S&P 500 companies which “beat” their final (lowered) estimates. If the estimates were fair and unbiased, we would expect this number to be around 50%. In fact, in the past decade it has been around 70%, and growing with time.
Earnings beats or misses do get headlines and contribute to near-term stock price moves, but from a fundamental point of view there is more sizzle than steak here.
Getting long-run historical PE ratios of US stocks by industry seems like the kind of thing that should be easy, but is not. At least, I searched for an hour on Google, ChatGPT, and Bing AI to no avail.
I eventually got monthly median PEs for the Fama French 49 industries back to 1970 from a proprietary database. I share two key stats here: the average of median monthly industry PE 1970-2022, and the most recent data point from late 2022.
Industry
Long Run Mean
End 2022
AERO
12.14
19.49
AGRIC
10.75
9.64
AUTOS
9.65
17.52
BANKS
10.38
10.46
BEER
15.23
35.70
BLDMT
12.00
15.41
BOOKS
12.95
17.60
BOXES
12.18
10.69
BUSSV
12.07
13.03
CHEMS
12.40
19.26
CHIPS
10.48
17.47
CLTHS
11.45
10.94
CNSTR
8.98
4.58
COAL
8.04
2.92
DRUGS
1.14
8.01
ELCEQ
10.78
17.85
FABPR
10.28
19.40
FIN
11.16
12.97
FOOD
14.30
25.03
FUN
9.10
21.06
GOLD
3.18
-5.95
GUNS
11.50
5.05
HARDW
7.96
19.16
HLTH
11.91
6.09
HSHLD
12.60
20.15
INSUR
10.95
16.33
LABEQ
13.46
25.18
MACH
12.51
20.27
MEALS
13.83
19.19
MEDEQ
6.81
27.64
MINES
8.06
16.27
OIL
6.96
9.00
OTHER
12.20
27.68
PAPER
12.50
16.69
PERSV
12.86
-0.65
RLEST
8.13
-0.30
RTAIL
12.26
8.58
RUBBR
12.11
12.81
SHIPS
9.79
17.42
SMOKE
11.74
17.79
SODA
12.38
32.09
SOFTW
8.21
-2.85
STEEL
8.18
4.30
TELCM
6.75
9.58
TOYS
9.18
-1.32
TRANS
11.25
13.11
TXTLS
9.43
-49.00
UTIL
12.34
17.41
WHLSL
11.08
13.13
Mean Industry Median
10.52
12.73
One obvious idea for what to do with this is to invest in industries that are well below their historical price, and avoid industries that are above it (not investment advice). Looking just at current PEs is ok, but a stock with a PE of 8 isn’t necessarily a good value if its in an industry that typically has PEs of 6.
By this metric, what looks overvalued? Money-losing industries (negative current earnings): Gold, Personal Services, Real Estate, Software, Toys, and Textiles. Making money but valuations 19+ above historical average: Medical Equipment, Beer, Soda. Most undervalued relative to history: Guns, Health, Coal, Construction, Steel, Retail (all 3+ below the historical average).
Of course, I don’t recommend blindly investing in these “undervalued” industries- not just for legal reasons, but because sometimes the market prices them low for a reason- that earnings are expected to fall. The industry may be in secular decline due to new types of competition (coal, steel, retail). Or investors may expect it to get hit with a big cyclical decline in an upcoming recession or rotation from the Covid goods/manufacturing economy back to services (guns, construction, steel, retail). Health services (as opposed to drugs and medical equipment) stands out here as the sector where I don’t see what is driving it to trade at barely half of its usual PE.
I’d still like to get data on long run market-cap weighted mean PE by industry, as opposed to the medians I show here. The best public page I found is Aswath Damodaran’s data page, which has a wide variety of statistics back to about 1999. Some of the current PEs he calculates are quite different from those in my source, another reason to tread carefully here. I’m not sure how much of this is mean vs median and how much is driven by different classification of which stocks fit in which industry category.
This gets at a big question for anyone trying to actually trade on this- do you buy single stocks, or industry ETFs? Industry ETFs make sense in principle (since we’re talking about industry level PEs overall) and also add built-in diversification. But the PE for the ETF’s basket of stocks likely differs from that of the industry as a whole. It would make more sense to compare the ETF’s current PE to its own historical PE, but most industry ETFs have very short track records (nothing close to the 53 years I show here). PE is also far from the only valuation metric worth considering.
All this gets complex fast but I hope the historical PE ratio by industry makes for a helpful start.
The term “investing legend” gets thrown around a lot, but in the case of Carl Icahn, it truly fits. He kicked off the modern era of corporate raiding by taking influential stakes in many companies and forcing changes to his personal advantage. In some cases (e.g., Trans World Airlines) this involved taking over and dismembering the firm, and selling off the pieces. He is considered by some measures to be the most successful “activist” investor ever. His personal wealth is (or was) on the order of $20 billion.
Icahn has rolled much of his personal holdings into a limited partnership called Icahn Enterprise L.P. (IEP). According to its blurb, “…Icahn Enterprises L.P., through its subsidiaries, operates in investment, energy, automotive, food packaging, real estate, home fashion, and pharma businesses in the United States and Internationally.” This partnership structure allows Icahn to cleverly avoid paying income taxes on the earnings from his enterprises. Another score for the old wolf.
This arrangement has also allowed us mere mortals to nibble on the crumbs from his table. IEP has paid a very large and growing dividend for more than ten years. Since 2019 it has paid $ 8.00 per year ($2.00 per quarter). This generous payout has made it popular among retail investors and has kept the price of IEP steady in the $50-$55 range for a number of years. This gives around a 15% yield.
It has always been understood that IEP does not actually generate enough cash to pay out $2.00 per quarter on every share, but since “Uncle Carl” owns some 82% of the shares and takes all his dividends in stock (again, to beat the taxman), it has all worked out. That is, until the past month, when IEP was the target of a “short attack” by the ominously-named Hindenburg Research. A short attack is when some outfit takes a short position in a stock, then publishes a report claiming all sorts of misrepresentation and malfeasance on the part of management, to scare the public into dumping the stock. The attacker pockets a tidy profit on their short position when the stock price tanks. Then on to the next victim.
Often, there is not much actual substance to a short attack, but in the case of IEP Hindenburg had something of a real case. Their claim is that the actual net asset value (NAV) of IEP is way, way below $50 / share, and even lower than the NAV officially reported by IEP. Hindenburg made lots and lots of other dire accusations, describing IEP’s operation as a giant Ponzi scheme. Ouch. Also, it seems Icahn has actually lost his mojo in the past decade (he is 87), making several market bets that went sour and lost billions. Anyway, some of Icahn’s old victims are not sorry to see the former shark being mauled by tactics similar to those he once employed.
The IEP stock price quickly dropped from 50 to 30 when the short report came out, then rallied back to about 36 after Icahn gamely announced that the usual $2.00 dividend was still going to be paid (stock chart below). That is where I sold about half my IEP shares to de-risk my position (disclosure: I had bought a very small amount before the Hindenburg report). The price then meandered around in the low 30’s for a couple of weeks, then started to slide down again.
Share price for Icahn Enterprises L.P. (IEP). Source: Seeking Alpha.
Icahn made numerous enemies in his career, including fellow corporate raider Bill Ackman. Icahn went very long on a company (Herbalife) that Ackman was heavily shorting, back in the day. One YouTube you can listen to a 2014 CNBC show where they had both called in, where they were hurling very personal insults at each other on the air. Ackman recently piled onto the short thesis for IEP, tweeting that even after the recent fall in price, the shares were still overvalued by at least 50%. IEP shares promptly plunged another 14%, to under $20. Icahn’s response: “Taking advice from Ackman concerning short selling is like taking advice from Napoleon or the German General Staff on how to invade Russia.” Some things don’t change.
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