Scary Chart Part III: Missing the Trees for the Forest

OK, so this is a continuation of the scary chart series (not really intended to be a series, and not really intending to be so actively posting!).

Whenever I see these big charts showing how the markets are overvalued and whatnot, I usually just go back to looking under the hood on what's really going on.  Sometimes the P/E charts look crazy (like it did in 2000 and now), stock market to GDP is off the charts etc.

But at the end of the day, most of us here are not S&P 500 index futures traders; we are investors.  And we at least pretend to be owners in businesses and not shufflers of pieces of paper. In that sense, all of these macro forecasting charts should be totally irrelevant.  OK, so maybe we should be aware of some of this stuff. But as far as what to do about it, unless you have strong odds of something happening, it shouldn't really drive any action on the part of business owners.

Odds
Speaking of odds, odds are often misused (or unused) in finance. I can't claim to not misuse them either. But here's what I mean. So often you hear people say the market is overvalued so they are going to short the market.

One thing that struck me is that every time Joel Greenblatt is on TV, he tends to tell us what percentile of valuation we are in and what the year-forward expected return for the market from that valuation level is. Now, that has problems too as you can argue that all of that data is based on a bull market period when interest rates were going down. But as flawed as it is, it is still much better, I think, than just shorting the market because it is overvalued and therefore thinking it must go down.  If the market is overvalued, then the expected return going forward is going to be low, but not necessarily negative (over time).

Plus, for those calling a turn in interest rates, look at the long term chart of interest rates that go back 100 years or more, and you can see that these major turns don't happen very often.  So basically, the odds of calling the turn in any given year is not very high.

Anway, what you never hear from the "I'm short cuz the market is expensive" is something like that; from these levels, the probability of a crash or bear market within the next year is xx%".

What you do hear is that when markets are this expensive, things don't end well.  And they are often right. Things often don't end well. But then again, it all depends on what your definition of "end" is.

It was a certainty that things wouldn't end well in the late 1990's and 2000. And many geared up for it. Of those folks who actually caught the crash back then or got out in time, how many got back in? What is their total return through all the cycles since then?

For reference, BRK grew BPS 9.4%/year from 2000 through 2015. BRK stock price rose 7.1%/year since then. If you were smart enough to own MKL, they grew BPS +12%/year and the stock price rose +11%/year in that time period. The S&P 500 index total return was 5%/year.

The same was a certainty back in the late 1980's; it was a certainty that things wouldn't end well.  The above figures would be even more dramatic than the 2000-2015 figures. This is not to say that we will have high returns like that going forward!

Back to the Trees
OK, so getting back to the issue.  As I said, one thing I do when I see scary charts is to go back and look at my holdings to make sure none of them are bubbled up. To see what's in store for the market overall, I will look at some major components as a sanity check to see how bubbled up the market is.

One of the first places I look is Berkshire Hathaway's (BRK) holdings. Buffett is the greatest stockpicker ever with a live portfolio we get to see in real time. If the market is bubbled up, there might be risk built into BRK too, which we may want to be aware of.

I like to look at current P/E because ttm P/E often has a lot of noise, write-offs etc. Of course we can't ignore those 'one-offs' as they often are not, but I like to look at companies based on a normalized earnings basis, and for that, current P/E often reflects a little bit more of a normalized picture (as analysts estimates often exclude charges).

Forward P/E is for the year 2017, so may be too far ahead for some.  Anyway, we are more than half way through 2016, so the numbers should be decent estimates.

Here is the BRK portfolio; I only include companies listed in the annual report. CHTR and KHC are not here as there are no earnings estimates available. I added AAPL. The list includes non-Buffett names, but since it's in the annual report top-holdings list, might as well leave them in.

	CurrPE	FwdPE
AAPL	13.10	12.15
AXP	11.88	11.79
KO	22.91	21.77
DVA	18.38	16.51
DE	20.15	21.72
GS	11.44	9.54
IBM	12.01	11.49
MCO	22.54	20.12
PSX	23.98	13.95
PG	22.41	20.71
SNY	12.96	13.17
USB	13.08	12.47
USG	15.83	12.48
WMT	17.34	16.75
WFC	11.91	11.43
average	16.66	15.07
median	15.83	13.17

So, looking at this, I think to myself, "where is the bubble?".  OK, the FANG stocks and many others are really expensive, but who cares, really, if you don't own them.  Right?  OK, if those guys collapse and cause a correction or bear market, many stocks will go down.  But from a valuation perspective, I don't see a big problem here.

Someone said the market will crash 50%.  OK.  Maybe it will.  But take a look at the BRK stock list and then cut their valuations in half. Do they look like sustainable valuations down 50%? I don't know. I don't think so.

Let's take a look at something more representative. The S&P 500 index is too unwieldy to look at individual names, so let's just look at the Dow. It has a high historical correlation with the S&P 500 index so it can tell us something about the market.

Here is the same table as the above with the Dow 30 stocks:

	CurrPE	FwdPE
AAPL	13.11	12.15
AXP	11.91	11.82
BA	21.17	13.85
CAT	23.65	23.38
CSCO	13.28	12.68
CVX	81.87	21.55
DD	21.54	18.62
DIS	16.83	16.00
GE	20.86	18.19
GS	11.52	9.60
HD	21.72	19.14
IBM	12.10	11.59
INTC	13.85	12.68
JNJ	18.50	17.41
JPM	11.57	10.49
KO	22.91	21.77
MCD	21.47	19.44
MMM	22.05	20.48
MRK	17.01	16.61
MSFT	20.06	18.00
NKE	23.64	20.55
PFE	14.29	13.26
PG	22.41	20.70
TRV	12.47	12.04
UNH	18.03	15.74
UTX	16.59	15.82
V	28.62	24.05
VZ	13.83	13.35
WMT	17.32	16.73
XOM	36.75	19.84
average	20.70	16.59
median	18.27	16.67

The Dow is trading at around 20.7x P/E, and 16.6x 2017 estimates. Well, actually, that's the simple average P/E of the Dow stocks.  Yes, on the high side historically. But again, I don't really see anything bubblish.  The high P/Es of XOM, CAT, CVX are due to depressed earnings, not speculative frenzy.  Some of the other high P/E names seem to be trading at where they have traded in the past.  Maybe some a little higher, but for the most part, they seem consistent with what I would expect them to be trading at in 'normal' times.  Nothing really screaming out at me that it has to crash. 

Conclusion

I'm really pushing it here with these posts; I know I'm setting everything up for a big crash. But it doesn't matter. That's not my game; I can't tell you if the market will crash or not. Don't look at this stuff and assume that it won't.

Bears will argue that the above P/E ratios are not valid as margins are bloated.  Well, if you go through the lists carefully, I don't agree that anyone is actually earning bloated margins.  Also, they will argue that revenues are largely funded by central bank money and government debt and therefore unsustainable (welfare checks spent at Walmart etc.)

I don't really know what to say to that and how to adjust for it, as it is really hard to predict where the demand will come from in the future. 

Anyway, I'm just looking at some things here and there to see what I find.

Scary Chart Part II

OK, so there was some feedback from my post about the scary chart.  A bunch of other scary charts were offered up along with a presentation by the great Stanley Druckenmiller.  I am a huge fan of Druckenmiller; he is no doubt one of the greatest traders of all time.

When I started out in the business, the must reads were, of course, Reminiscences of a Stock Operator and these books:


 

I started out in the trading side of the business more than the investment side, as you can tell from these books.  I wouldn't consider any of these books essential reading for the typical value investor, but they are great books to learn how great traders think and make money.  These are true classics from the all-time greats, even though I may not be a big fan of some of folks in them.  

Druckenmiller is featured in the second book, The New Market Wizards.  It's a great interview. You can't argue with what he says and you can't argue with his results!

Speaking of great interview collections, the above two may not be required reading for value investors, but there are two that I think are must reads.  There have been a lot of books like these in the recent past too, and many of them are great, but these two are true classics.  Most of you have read these, but I think some of the younger generation may not have read these; they used to be available at book stores, but I haven't seen these recently. 

The first book includes investors such as Warren Buffett, Paul Cabot, Philip Fisher, Benjamin Graham, T. Rowe Price, John Templeton, Larry Tisch, Robert Wilson etc. 

The second book includes investors such as Jim Rogers, Michael Steinhardt, Philip Carret, George Soros, John Neff, Ralph Wanger, Peter Lynch etc. 

I've been meaning to reread all of these for a while.  I should do it now that I've mentioned them.  I feel like the Book-lyn Investor today. 

Back to Scary Charts

Anyway, OK, let's look at some of this scary stuff.  Druckenmiller's presentation is really good and it is true that returns going forward are probably not going to be as great as it was in the past.  The wind at our back of constantly decreasing interest rates and increasing valuations along with a strong economy largely driven by increasing leverage in the system may become headwinds going forward.  We can't expect much of a valuation boost from lower interest rates, nor a stronger-than-deserved economy based on increasing leverage (bring forward demand). 

Here are the charts that tell this story: 

These charts are truly scary.

But here's the thing. The exact same argument has been made since at least 1990.  Check out the same charts as above only cut off in the early 1990's.  The same exact argument was made at the time.  In fact, during the 1990 bear market, it was claimed that we can't recover for these reasons.

Look at the chart below.  It was claimed that the stock market bull was driven largely by the bond bull market; lower rates => higher valuation.  Interest rates were back to levels last seen in the 1960's.  That was a pretty dramatic chart back then, and the bond bull market of the 1980's really looked complete no matter how you looked at it.

It was also claimed that the entire bull market and strong economy was fake and was driven largely by increasing debt.

The chart below looked really scary in the late 1980's and early 1990's.  It was commonly believed that the bull market in interest rates was near an end and that the debt levels in this country was at a limit.  The economy and entire system had only one way to go: down.

And yet, the S&P 500 has increased seven-fold since 1992 (total return), for a 9%+ annualized return.  If you said back then that the market would return 9%/year over the next 23 years, they would've thought you were nuts.  Like, how can that happen?



When the market collapsed in 2000 and 2008, similar things were said.  Returns haven't been so great since 2000 to be sure.

Now go back and look at the first debt chart. I have no idea how and why the debt was able to rise so much since 1990 with little effect.  I have some theories and ideas, but maybe that's for another post.  Can we keep going up like that?  Probably not.

With interest rates, I have no idea where they would go.  If I was sure rates would go back to 6-8% within a year, then I have some great trade ideas.  But I have no idea, really. I really believe that it is just as likely that 10-year rates will be 0.5% as it will be 3.0%.

Conclusion
This is not to say there won't be nasty bear markets ahead.  There will be.  The folks calling for a big bear market / crash are much smarter and richer than I am.  So I would not ignore those views.

On the other hand, we have to remember that these calls have been made in the past and sometimes the most obvious, inevitable conclusions don't pan out as expected. This is not to say that these scenarios will never pan out. I'm just pointing out that it's really hard for even the smartest people to figure out when it will happen.

Japan, for example, looked arithmetically at an end-point, ready for a complete implosion.  And yet, that day hasn't come yet.  We might as well call the JGB market the widow-maker.  Seriously.

This is not to say that just because something hasn't happened yet, that it won't ever happen.  Overweight, heavy-drinking smokers can tell you they are fine, and that they've been fine for many years.  Still, I would not bet on their long term health.  But I wouldn't really bet on their imminent death either.

This is a sort of post I don't like to make, especially with the market making new highs, VIX and put/call ratios at lows etc. It makes me feel like the market will crash right after I hit the "publish" button.

Anyway, again, as with my other posts on the topic, I am not predicting a continuing bull market or an imminent bear market or anything like that.

And there is a lot I don't understand.  Where and when will the rubber band of debt snap, especially in Japan?  Debt levels can't keep going up forever.  If rates do go up, a lot of this debt won't be serviceable.  The math there is terrible.  But when does this become an issue?  I have no idea.


SuperInvestor Portfolios
By the way, for new people, I have a couple of pages on the blog where I post screen/sorts of superinvestor portfolios.  The portfolio holdings themselves come from Dataroma.  Every week, I sort the holdings by year-to-date returns and also do a valuation sort.

The year-to-date returns have been working fine, but the fundamentals sort kind of broke because Yahoo Finance changed their website; the old program stopped working.

I am actually working on that as I type; the small portfolio has been updated successfully, but the large portfolio script keeps crashing.  It takes a lot of time now since the Yahoo Finance statistics page has Javascript enabled content, meaning I can't just grab data off the website easily like before.  Now I have to use a browser and let the Javascript run to put the content on the web page before grabbing the data, and this takes time.

So go take a look.  The script skips names when any errors occur, so there may be some valid names not included in the screens; I saw that the script kicked out PEP for some reason.  I have to do this so the program doesn't crash in the middle of a long run etc...

SuperInvestor Winners and Losers
SuperInvestor Stock Rankings

Scary Chart!

Another post!  Don't assume this is going to be the normal frequency going forward.  I think my previous pace of 1-4 posts a month is the best you should expect.  Anyway, I came across (again) a scary looking chart, and I hear people screaming to sell everything now, so I thought I'd revisit the issue of the whole market again.  This may be new to people who are new here so there is that too.

Anyway, check out this chart below.   Here is the full article:
Advisor Perspectives article on NYSE margin debt

Digression
Oh, and by the way, I noticed that Sequoia initiated a position in Chipotle (CMG).  I still really like CMG, but I also agree that it is not a cheap stock at all.  I did buy some due to this 'crisis', though, even though it didn't get cheap by the usual measures.

Anyway, I think they did get a raw deal last year.  CMG tried to explain that every time the CDC came out with announcements, that they were not new cases of food poisoning, but just announcements of old ones that already happened. They all happened early on, clustered during a certain period. But the annoucements of each case dragged out a little at a time, so what it looked like was that CMG had a food poisoning case and then they announce measures to fix it, and then another announcement comes that happened BEFORE the fixes were put in place. But the public thinks it happened AFTER measures were taken to prevent it.

So things looked really out of control.  People were like, holy cow, they can't stop it!

But that was never the case. I think they will be back even if it takes a little more time (due to the above, unfortunate thing).

Oh, and by the way, the chorizo burrito is amazing!

Back to Topic
To be fair, the author doesn't claim that this is an indicator of any sort.  But I've seen/heard others warn about this as an indicator of a coming crash.



Yeah, it's scary alright.  In the full article, there are various variations of this chart.  But I was curious why they didn't put up the one that seems to me the most important.  When I saw this chart, my first reaction was, well, gee, it's a coincident indicator.  Of course margin debt goes up when the market goes up and vice versa.  That's sort of natural and you would expect that.  The question is, as far as I'm concerned, how much is margin debt expanding relative to market cap?   Back in the late 1990's, one of the tells was that this margin debt expanded suddenly and exponentially.

How is it looking these days?  You can google "margin debt as percent of market cap" to get long term charts of this.   I recreated it with data from NYSE, but the data didn't go back too far. Maybe there is fuller data somewhere, but for now, I just found stuff back to 2004.

Check it out:

NYSE Margin Debt as % of NYSE Market Cap

Anyway, margin debt went above 2.00% of market cap back in 2013. I think that was the marker of a bubble in the past, and the market is up 50% since then.  Of course, this doesn't mean that a bubble doesn't exist.  It is possible that the speculative frenzy goes further and lasts longer than people imagine and then implodes.

But if you compare it to the 2000 spike, it isn't similar at all.  It doesn't feel like a speculative, blow-off spike in margin debt.  Back in 2000, margin debt blew up from 1.3% or so to 2.6%, basically doubling.  After the bubble popped, it came all the way back down to pre-bubble levels of around 1.3% (I'm eyeballing this on a long term chart so may be a little off).

Recently, it crept up from 1.8% at the crisis low up to close to 2.6% in January of this year.  It's been slow and gradual.  Debt is debt, though, so maybe this is not a mitigating factor.

Not to be too bullish, but there are many reasons why margin debt is higher these days than in the past.  Note how margin debt didn't go down that much even during the financial crisis.  That was when a lot of speculative excess was blown out.  There seems to be a lot of discussion about this here and there, but one major reason of an uptrending margin debt is that margin rates are a lot lower now than in the past due to competitors like Interactive Brokers who offer rates less than 1%.  Typically, margin rates are more in the 6-8% range regardless how low interest rates get.

In this environment, you can imagine a lot of carry trades going on; investors buying high yield stocks, MLP's (OK, maybe not so much now), REITs on margin.

Of course, that is not so comforting either.  When carry trades go too far (when too many people try to cross the same bridge at the same time), it can blow up.

But it's not the same as the late 1990's when people just bought stock splits and dot-coms on margin (I remember almost everyone seemed to have stock split announcements sent to their beepers at the time so they can enter buy orders on those names).

So even if it may not necessarily be good news, I think some of this margin debt simply reflects the divergence in dividend yields and interest rates; and for the first time in history it seems like individual investors can play the carry game with competitive cost of carry.


Other Scary Charts
The other scary thing these days that people keep talking about are valuation levels.  We are at historically high levels.   CAPE ratio is very high etc.

And the bears say, the bulls use interest rates as an excuse for the high valuation. They say that when interest rates finally start to go up, the stock market will take a hit.  This is true.

But let's take a look at some charts to see if there is any validity to the bulls (or, let's say, not-so-bearish arguments).

First of all, there are bears that argue that the Fed model (comparing stock market earnings yield to the 10-year bond yield) is flawed, and that it only worked for a short period of time in the past. This is also true and I sort of validated that in a previous post that I will go back to in a second.

But having said that, we still can't separate stock market valuation from interest rates. To use the time-honored tradition of hiding behind a higher authority to make a case, here is Warren Buffett himself tying the valuation of the stock market to interest rates, and long before the so-called Fed model showed any real correlation.  Read it here:

   Buffett on Market Valuation

When interest rates are low, asset prices are high for obvious reasons.  This is simple economics and I can't really convince anyone who doesn't agree with that.

The argument, I suppose, is that interest rates are at unsustainably low levels due to the central bank money-printing around the world (and therefore stock market valuations are unsustainably high).

There is some truth to that too. I won't argue with that.

So, since we looked at and talked about some popular 'scary' charts going around, let's look at some other charts that I like to look at that doesn't get passed around all that much, I suppose, due to the lack of dramatic effect; they are not scary!

Bond Yield versus Earnings Yield
First of all, if you are new here or you don't remember, skim this past post.  I scatter-plotted bond yields versus earnings yield going back to 1871.

Here is the post:  Scatter Plot

The data goes back decades so I didn't update it.  Adding 2015 to it won't make a big difference either way.

As you can see, there is a relationship between bond yields and earnings yield.  The longer the history, the less the correlation.  But that may be due to many things. Accounting rules, interest rate regulations etc.  Not to mention how stocks are valued in general; remember, in the old days stocks were considered speculative and it was unthinkable to buy a stock that yielded less than government bond yields.  But this was not true for most of the second half of the last century.

In any case, I too believe that interest rates are probably at unsustainably low levels, even though I still lean more towards "lower for longer", following the Japan model (but better).

So let's assume that interest rates will go UP, and then let's see how overvalued the market would be in that case.

My simple analysis is that long term interest rates should be around where nominal GDP growth is. See the above scatter-plot post for why I think so.

Let's say we get to what the Fed wants; 2% real growth and 2% real inflation.  That would give us a 10-year rate of 4.0%.

Here is a cut-and-paste from the scatter post:

When interest rates were between 4% and 6% since 1955, the stock market traded at an average P/E of 20.4x.  If you put standard deviation bands around the cluster, the range would be 16.6x - 26.6x for one standard deviation and 14x - 37.9x for two standard deviations.
If you expand the range to 4-7% or 4-8%, then the average P/E comes down to 14x, so in that case the market would look overvalued.  But I think a lot of the vertical dot cluster in the 7-8% range is from the 1970's.  Of course, we can't assume that won't happen again.
Just for fun, let's see these figures from 1980-2014.  Some will argue that this is no good since the market has been overvalued for most of the past three decades.  But again, let's just see for fun. 

                   Interest rate range            average P/E                   

                            4 - 6%                            23.3x                
                            4 - 7%                            22.7x
                            4 - 8%                            21.6x

If you do it by constant range (instead of expanding it) you get: 

                   Interest rate range           average P/E

                   4 - 6%                             23.3x
                   6 - 8%                             19.6x 

Using data since 1980, even if rates went up to the range of 6-8%, the market would be fairly valued at 19.6x P/E.

Yes, we can argue back and forth all day about whether we should use the data from 1871 to now, since 1955, since 1970 or since 1980.

I tend to favor excluding data from before 1950 for the usual reasons.  I know not everyone will agree with this, but that's OK.  I am not trying to predict the market or convince anyone of anything.  I am just looking at the facts and going, hmmm.... that's very interesting...

The point of the above is that even if interest rates go up A LOT,   (10-year rates are now 1.5%, so even if rates more than double), the market is not overvalued.

Regression Lines
I don't remember why I didn't tabulate the regression lines in the scatter post, but here it is.  The 1980-2007 line has a really nice fit with an R-squared of  0.77.  And yes, critics will argue that is overfitted as I am excluding periods that are inconvenient.

But it's not unreasonable to say that the 1970's was an aberration and the crisis too was one (period after 2007).  The regression fit nicely for 27 years, so that's not insignificant.

In any case, yes, it's kind of 'convenient' and maybe overstates the case to some extent. But even if you look at the regression for the periods 1955-2015 and 1970-2015,  they show that at an interest rate of 4.0% (more than double current level!), the market would be fairly valued at 19-21x P/E.

If rates continue to go down, I would NOT chase the market up and use lower interest rates to get fair value of the stock market. So I tend not to agree with people who say that the market is really undervalued with interest rates where they are.  The market is only really cheap if you think interest rates will stay at 1.5% for a really long time.

Conclusion
So there it is.  Some other charts that are not so dramatic and scary. Interest rates can go up a LOT and not really impact the fair value of the market.  This is not to say that there won't be short term blips.  If rates go up, stocks will probably go down.  But the point is that they don't necessarily have to move down a lot to correct valuation levels unless interest rates go up a lot more than 4-5%.

And, this is not to say that there won't be bear markets. Markets will go up and down regardless of all of this stuff, so this is not a prediction.  It's just a point of reference to see if there is any rubber band being stretched in any way that has to snap back violently.

(A short term chart like the above showed a serious deviation right before Black Monday).

If abnormally low interest rates are the reason you think the stock market is overvalued, then shorting bonds seems to be a much better idea than shorting stocks.

Added comment:  By the way, the bears keep saying that the bulls think this time is different.  Hmmm... The above charts sort of show that, no, at least in my case, I am claiming that this time is not different at all, and the market is trading right around where you would expect it to be trading at, even if rates get up to 4-6%.  Indeed, this time is not different.

Anyway, get yourself a Chiptopia card, try the chorizo burrito and enjoy these charts!

Record Valuation Spreads!

It's been a while, I know.  I was browsing around the net as usual and came across something that was at the back of my mind for a while now and it was graphically illustrated convincingly so I thought it would be a great excuse to break radio silence here.  Which, by the way, is not intentional.  I never made a decision to scale back posting or anything like that. I will try to get more active again because I do often have a lot to say about a lot of things.

Anyway, as usual, a digression (or two), even though I haven't even mentioned the main topic.

Brexit

It's a little late to be talking about this, but this is what I was thinking throughout this 'panic'.  Of course, like everyone else, I was terrified when the vote came.  I never really put much thought to it either way, but when I saw the markets going nuts, I was terrified.  

But then I thought about it for a second. OK, so the Brits want out.  Fine.  Capex and business might slow down for a while as there is uncertainty that wasn't there before; can we build a plant in Britain or not?  Do we have to move to continental Europe?  Will banks have to move or not?

Two things came to mind when thinking about this.  First of all, if you look at all the major tops, markets rarely make a top on some specific news like this.  This just felt like fiscal cliff and other mini-panics we've seen in the recent past. 

I couldn't imagine, that 20 years from now, that we would be sitting here and looking at a long term S&P 500 chart and go, "see here? That's the high of 2016.  Things were OK until Brexit and that was it.  It was all over...". 

No matter how hard I tried to imagine that, I couldn't. 

Second of all, yes there is short term uncertainty, just like the fiscal cliff, end of QE, 9/11 or whatever.  But if you look out over five or ten years, how much economic impact is Brexit going to have?  People are still going to eat, travel, buy cars and whatnot. Sure, things may be time-shifted due to uncertainty. Maybe someone holds off on expanding capacity in England until things are more clear.  Maybe things will shift geographically.  Maybe Nissan closes a factory in England and opens one in Germany instead.

Over time, things will be made and consumed.  In five years, I don't know if you'd be able to tell by looking at most company income statements and balance sheets what happened. 

And if that is the case, who cares?  The market will understandably go down as people take risk off due to short-term uncertainty, but that doesn't have anything to do with intrinsic value of great businesses five years out.

Also, as is often the case with these things, the situation is dynamic.  If you analyze the situation statically, then Brexit can be disastrous in many ways.  But it is a dynamic situation. We have to remember that the Europeans need the Brits too.  They can't just say, OK, fine.  Leave.  And no trade.  So people will have to work to minimize the damage.  Companies are not static, linear organizations.  They change and adapt to the situation (well, at least the good ones will). 

And not to mention the tendency in some situations for an over-reaction; for example, central banks/governments may, out of fear, overcompensate for the potential negative economic pressure.  And who knows, that might actually end up being bullish. 

So, after thinking about all of that, I chose to ignore Brexit, even though people I respect were saying that this is serious and is a big deal that will cause a huge crisis.  You know, it's still early so it might.  Who knows.  But this is not the sort of thing I think I have an edge in predicting. 

Alternative/Market Neutral Funds

Here's the other thing I've been thinking about again recently.  As you know, it's been a peeve of mine for years; mutual funds that try to tactically time the markets and make money in 'all' markets.  I guess there are some that can do it well over time, but most don't. 

I guess what is surprising to me is that some fund managers allocate short market positions as if it were an asset class.  For example, you have funds that think the market is overvalued so they are short the market. OK, for macro hedge funds that makes sense as they are active traders and manage their risk.  If they are wrong, they get out and try again later. 

But when you apply this sort of thing with an asset allocation mindset, then you end up short for years and have terrible performance. 

OK, that's fine.  But here's the part I don't get.  If stocks are overvalued, say, at 20x P/E, I can see how some may reduce their exposure, go to cash or bonds or whatever. 

But if you go short, just because expected returns are low, then your expected return on that short position is still negative, even though it's a small negative.  If you think expected returns for stocks is a low 2-4%/year going out, why on earth would you short the S&P 500 for an expected loss of 2-4%/year? 

That makes no sense to me.

Anyway, it's just another thing that has been baffling me recently.   Again, this doesn't apply to the macro hedge funds as they are active traders.  They don't go short and just sit on it for years (well, some actually do that but still manage their risk well enough to make money). 

Valuation Spreads

OK, so to get to the original topic of what this post is about.  I really enjoy the research by Pzena Investment Management.  I keep referring to them but I don't own any funds they manage, nor do I own the stock. And I don't know anyone that works there either, just to be clear as it might seem like I'm promoting them.  

Anyway, check these charts out.  They are sort of mind-blowing.  And for value investors, very exciting to see. 

Make sure to read the whole report here:  Pzena 2Q commentary 

The charts below are the valuation of the bottom quintile stocks compared to the average (or equal-weighted composite valuation).  The higher the figure, the cheaper the cheapest stocks are compared to the average.  Figure 5 shows the same but compares the cheapest stocks to the most expensive. 

You will see that the spread is at historically high levels.  That's kind of amazing.  This is very, very interesting considering the big boom now in 'passive' strategies.  Does this look like an environment where you would want to invest passively? 

OK, so up to here you might say, so what?  That's great for long/short equity funds. But what about long-only value guys?  Well, Pzena has already thought of that, and here is how the bottom quintile (cheap) has performed three and five years after the spread widens.

.

Alpha may not be too encouraging if you are a big bear.  10% alpha could still be a 20% loss if the market is down 30%. 

How to Play It? 

Of course, the obvious way to play it is to stick with cheap stocks.  That is always a great idea, but it seems like it's a really, really great idea now. 

But, there is another interesting idea here.  Most of you have probably already thought of this. 

You know that one of my favorite authors and fund managers has a company running mutual funds.  Yes, Joel Greenblatt. I'm so predictable. 

And yes, I know, the Gotham Funds have not been doing so great performance-wise.  But if you see the above charts, it's easy to see why:  expensive stocks have been getting more expensive and cheap stocks are getting cheaper. 

Now, I am not a big fan of mean-reversion when looking at the market.  I do believe in mean-reversion to a point.  But that has lead people astray for decades.  For example, people waiting for mean-reversion of P/E ratios in the stock market have been waiting for 20, 30 years. Dividend yields too, for even longer. People waiting for interest rates to mean-revert have been waiting for decades too. 

But some things do mean-revert much more reliably. I would say volatility is one of those things. Volatility can't and won't stay above 20-30% for any length of time. 

Another, I think, are the above valuation spreads.

If you think those charts will keep going up like that, then invest in momentum funds and chase the hottest funds and you'll be fine (if those charts keep going up exponentially like that). 

But if you think things will mean-revert, then piling into value stocks seems like a great idea. 

If you want to be market neutral and 'safe', then the Gotham long/short funds are probably perfect; it may be the best time, ever, to invest in the Gotham long/shorts. 

Gotham's long/short funds mechanically (with human overlay, I hope) short the dearest and buy the cheapest stocks.  True, they are not using P/B ratios, so investing in a Gotham long/short fund would not be the same as trading those charts above.  But I would imagine they would be correlated.

Gotham Funds

So, returns so far at Gotham haven't been so great.  Not so bad either, but not so exciting. The charts above sort of indicate why that was so, so far... 

...but things may be starting to look better...

Forgot to post this more updated table when I initially posted this.  Year-to-date looking much more interesting.  These returns can really take off on any big mean-reversion of valuation spreads...

So, if you think the above charts will keep going up, and more and more money will keep going into passive strategies, then ignore all of this, maybe. 

But, if you think that the above chart rubber bands will snap the other way, eventually, and that active managers will start to outperform passive strategies etc., then maybe think about investing in some good value managers, long/short equity funds etc

Here is their webiste:  Gotham website. 

I think today, this is one of the most contrarian bets you can make! 

Oh, and I don't know anyone at Gotham either... 

JPM Annual Report 2015

It's been a while since I last posted.  The only explanation, I suppose, is inertia.  When you post a lot, you post a lot.  When you don't post for a while, then you stop posting.  It's true I started getting busy in September last year (kid/family stuff, mostly, so good stuff).  And then you just get used to not posting etc.

Anyway, some of my favorite annual reports are out, so I thought I'd use that as an excuse to break the silence and try to get back into posting more regularly.

The JPM report, as usual, is really well written.  I see a lot of people have a lot to say about it and I guess that's good, that it gets attention and gets people talking about the various issues.

I noticed Cramer saying that Dimon is whining too much and that he should admit and talk about all the things that JPM has done wrong and not just criticize regulations/policy.  To be fair, Dimon has talked a lot about what JPM and the industry has done wrong over the years, often in real time.  He has been doing that for years, so it's not like he hasn't taken responsibility for a lot of what's coming at the industry these days.

But I do agree that a lot of this stuff (anti-corporate, anti-big-bank rhetoric) seems to be going overboard.  As usual, people tend to expend a lot of energy fighting the last battle (and missing what's coming next!).

Anyway, enough of that.  Let's take a look at some cool charts.

Performance
Dimon's letter is full of great charts.  I wish more annual reports were like this. But then again, if you don't have a great historic track record, you wouldn't want charts like these in the first few pages of your report.

For many years since the crisis, people kept saying that JPM is putting up fake profits by reversing loss reserves and that when that runs out their earnings will tank.  Or that spread compression will continue so their earnings will tank on that.  Or that increasing capital requirements will hit their earnings. Well, they've been saying these things for years but JPM made record profits again in 2016.

And tangible book value per share has been rising every year since 2004.  Since the 2007 peak, TBPS has increased 10.3%/year.   That's pretty astounding.  This includes the great recession/ financial crisis, and the Whale 'disaster'.

TBPS has outperformed the S&P 500 since Dimon became CEO of Bank One, and since the Bank One/ JP Morgan merger.

Total return of the stock hasn't been as great, though.  But a CEO can't really control the stock price.

Dimon regrets that the stock price, while outperforming the industry, has only kept pace with the S&P 500 index.

Just for fun, and since Dimon and most of us are Buffett fans, I'll compare these figures with Berkshire Hathaway (BRK).  This may not be totally fair as I will compare tangible BPS growth of JPM with the BPS of BRK.  BRK does have a lot of goodwill on the balance sheet so it will make a difference.  So keep that in mind.  Still, BRK's BPS growth is a decent benchmark for performance of a great CEO.

First, let's just look at the BPS changes:

                          JPM            BRK
2000-2015        +12.5%        +9.2%
2004-2015        +13.7%        +9.8%
2007-2015        +10.3%        +9.0%
1 year                +7.9%          +6.4%
5 year                +9.8%          +10.3%
10 year              +7.9%          +10.1%

The figures for JPM are from the tables/charts above.  The 1, 5 and 10 year figures exclude dividends as I just looked at the TBPS chart.  JPM figures start during the year for 2000 and 2004 whereas for BRK, I just used the closest year-end figure (so as to minimize my work-load).

The bold figure is the higher one.  You will see that JPM has outperformed BRK in just about every time frame, even from the 2007 high.  That's really crazy when you think about it  (The five and ten year exclude dividends so is understated).

In 2007, right in front of the worst financial crisis since the great depression, if you knew exactly how bad it was going to get, you would never guess that JPM will outpeform BRK over the next eight years.  JPM had trillions and trillions of derivatives exposure, billions of mortgages, investment banking business exposure etc.  And BRK was a rock solid winner in bad times with the greatest capital allocator of all time etc.


OK, let's look at the stock price.

                          JPM            BRK
2000-2015      +10.2%          +8.2%
2004-2015        +7.6%          +7.6%
2007-2015        +7.8%          +4.3%
1 year               +8.4%          +1.4%
5 year              +12.1%       +10.4%
10 year              +7.9%          +8.3%

By stock price, JPM outperforms in just about every time frame too.  This one doesn't have the tangible BPS versus BPS problem, so is 'pure' in that sense.   Not bad at all.


Best in Class Across the Board
And it's not like JPM is doing well in one area versus another.  It seems like they perform consistently in all areas, which is reassuring.

Break Up the Big Banks?
Dimon spends some time talking about the big bank issue.  You may not agree with everything he says (I do, though... surprised?), but he raises many valid points.  The thing that annoys me about this argument is that the biggest problems (well, OK, Citi was a problem) were Lehman, Bear Stearns, Merrill Lynch and Morgan Stanley.  Oh, and AIG, which wasn't even a bank or investment bank.

JPM, WFC and even BAC did fine throughout the crisis.  Well, BAC got into trouble for what it did during the crisis, but I think they were fine going into it.

Anyway, here are some interesting charts in Dimon's letter that shows that our big banks aren't even that big, relatively speaking, compared to other countries.

Call me stubborn (or stupid), but I still think Glass-Steagall is not an issue, really.  I know many veterans on Wall Street (even the ones that wanted it repealed) believe that Glass-Steagall should be reinstated and that investment banks and commercial banks should be separated.

This has never made any sense to me.   If you are a financial services company and have a client that needs to raise funds, why should there have to be two separate entities depending on if you want to borrow money from you (as a bank) or sell bonds to your clients (as an investment banker)?

I remember reading about the old days when institutions were highly regulated, based on things like if you are making long term loans or short term loans, interest rates were regulated etc.  In fact, the S&L industry was very highly regulated and they blew up spectacularly.  I don't think any one S&L was big enough to threaten the financial system, but they all seemed to blow up at once.  Too big to fail? Or too many to fail?

The Solution
Buffett probably has the best answer to all of this; clawbacks and make sure that the CEO ends up in the poorhouse if their bank fails.  The fact that the CEOs that blew up their firms during the financial crisis are playing golf at exclusive clubs and are living rich is really annoying even to me (the big financial industry groupie/cheerleader).   OK, this has nothing to do with Dimon's letter.

Increasing capital requirements drastically may not matter as many banks that blew up early in the last century had very high capital ratios.  Turning banks into utilities, as Dimon says, makes no sense either.  Utilities are monopolies, first of all.  Banks are not.

Utilities have their own problems, and they've had their own blowups.

Interest Rates

In the letter, Dimon says he is not worried about negative interest rates.  He is in fact much more worried about interest rates going up faster than they expect.   And in the Goldman Sachs letter, Blankfein/Cohn say, "We don't see how a world of zero or negative interest rates could possibly be the 'new normal'".  

To which I say, "but what if it is!!??!". 

That would be my big fear for financial stocks.  We have all been watching the impossible happen, first in Japan, and now in Europe.  Yes, we are better here for sure.  But how much better?  Can we really avoid this 'new normal' if it continues in Japan/Europe etc.?  Are we strong enough to resist such a strong force?  Even the strongest swimmers will drown if weighed down by an anchor heavy enough...  I don't know.

Anyway, the letter is a great and educational read so go read it!

Proxy
By the way, there is a shareholder proposal in the proxy.  But before that, let's take a look at some charts from it.

So Dimon's pay is performance based, and we are getting a great deal.

Anyway, here is the proposal:

Proposal 7Appoint a stockholder value committee — address whether divestiture of non-core banking business segments would enhance shareholder value

Bartlett Naylor, 215 Pennsylvania Avenue, S.E., Washington, D.C. 20003, the holder of shares of our common stock with a market value in excess of $2,000, has advised us that he intends to introduce the following resolution: 

Resolved, that stockholders of JPMorgan Chase & Co. urge that:

1.	The Board of Directors should appoint a committee (the ‘Stockholder Value Committee’) composed exclusively of independent directors to address whether the divestiture of all non-core banking business segments would enhance shareholder value.

2.	The Stockholder Value Committee should publicly report on its analysis to stockholders no later than 300 days after the 2016 Annual Meeting of Stockholders, although confidential information may be withheld.

3.	In carrying out its evaluation, the Stockholder Value Committee should avail itself at reasonable cost of such independent legal, investment banking and other third party advisers as the Stockholder Value Committee determines is necessary or appropriate in its sole discretion.

And here's the supporting info: 

The financial crisis that began in 2008 revealed that some banks were “too big to fail.”  This is the moral hazard that invites managers to take extraordinary risks with an understanding that taxpayers will rescue the firm, as failure would cause widespread financial chaos. That 2008 rescue may have served JP Morgan’s creditors, but shareholders suffered. JP Morgan stock fell from $49.63 on Oct 1, 2008, to $15.93, on March 6, 2009.  

Risk-taking at major banks can be especially lethal following the elimination of certain activity restrictions (known in the vernacular as “Glass-Steagall”) on how a bank can deploy FDIC-insured deposits. Congress began to address some of these problems with the 2010 Dodd-Frank Act. But an analysis by Goldman Sachs argues that implementation of this law means JP Morgan would be worth more in parts. 

The crisis and subsequent events have also demonstrated that JP Morgan may be “too big to manage.” Mismanagement of deposits by a half-dozen London-based traders (known as the “London Whale”) sent JP Morgan stock down 24 percent. Further, shareholders have paid more than $30 billion in fines because bank managers failed to prevent misconduct in a variety of operations. 

We therefore recommend that the board act to explore options to split the firm into two or more companies, with one performing basic business and consumer lending with FDIC-guaranteed deposit liabilities, and the other businesses focused on investment banking such as underwriting, trading and market-making.  Divestiture would also give investors more choice and control about investment risks.

You can go read JPM's response to this, which is good.  But what I was thinking as I read this was:

• Well, the stock price declined a lot, but JPM didn't lose money in any single quarter throughout the crisis!  Look at the charts in the letter to shareholders.  There is not even a blip where the financial crisis occured (in terms of TBPS). 
• My old-fashioned thinking is that Glass-Steagall's elimination can't be the cause of the crisis because the biggest problems occurred at independent investment banks.  In fact, GS, MS and others wanted to become attached to banks to enhance stability; this is exactly the model at JPM, and that is why JPM was so stable throughout the crisis.  Citibank had problems, but that's a whole other story,  I think. 
• The London Whale trade made the JPM stock price go down, but it was pretty inconseqential, relatively speaking (loss versus shareholders' equity etc.).  Ironically, in hindsight, it's basically a tempest in a teapot...  
• JPM paid $30 billion in fines, but other firms paid a lot of fines too.  GS, MS and others paid fines too because "managers failed to prevent misconduct in a variety of operations".  

Anyway, as it says in the proxy, JPM has described at their investor days in the past few years why the integrated model makes sense. 

OK, so that wasn't so hard (to make a blog post after three months!). 

AMETEK, Inc (AME)

Seriously, I am not stalking Lou Simpson at all (or at least any more than any other 'great' investor).  But this sort of jumped out at me.  It's sort of old news as the 13-F's came out in November.

Sometimes, some investors just buy or own stuff that just resonates with me, like that time Nehal Chopra of Ratan Capital was on CNBC talking about Post Holdings and Charter Communcations.  I owned (and still own) both of them.  Apparently, Chopra dumped POST when it tanked but bought back recently.  I rode it all the way down without selling anything and am nicely in-the-money on it now.

At the time, I had no idea who Chopra was.

This is sometimes why I post about certain investors.  If they do something that interests me, I will make a post about it.  And if it happens three times in a row, well, so be it.  Surely, other investors have made more interesting buys recently.  This is just what jumps out at me.  By the way, I don't own BAM, SCHW or AME.

Anyway, AMETEK (AME) has been mentioned here in the past (by readers) as an outsider-CEO-type company; growing through acquisitions etc.  Maybe you can call it a DHR-like company.  I guess "outsider-CEO-like company" might not sound so great now after VRX, but whatever.

And by the way, I know it's been a while since I posted.  I never make a post and then say, OK, I'm going to take a break for a month or two from blogging.  It's just that time passes and then it's like, wow, I haven't posted in more than a month!  Well, all sorts of things happen, some travelling, obsession with other things etc.  But my main thing is still investing; it's just that sometimes time flies without me having made a post even when some ideas pop up (and I never bother to make the post for one reason or another).

Simpson Buys Big
So check this out.  Simpson had no AME shares earlier this year (and never showed up in any 13-F for SQ Advisors recently).

Number of shares of AME in SQ Advisors' 13-F:

3/31/2015:   0
6/31/2015:  1.8 million
9/31/2015:  8.1 million

So that's kind of huge.   The 13-F as of September-end showed $3.0 billion in U.S. stocks, and more than 14% of the portfolio in AME (this excludes cash and other assets that are not U.S. listed stocks).

Lou Simpson Portfolio

My last couple of posts related to Simpson were about BAM and SCHW, and AME is even bigger than those.  It's also interesting that Simpson added to VRX in September, but this was before the real crash in the stock.  I wonder what he did after that. It is interesting how Munger can really despise this company and Simpson can like it enough to make it such a large holding (he has owned it since (at least) 2011 and actually owns more shares now than in 2011; 2 million shares as of September 2015 versus 1.2 million back in 2011).


AME
AME has been run by Frank Hermance (now aged 66 or so) since 1999.  He became President and CEO in September 1999 and Chairman and CEO in January 2001.   AME aims to double the size and profitability of the company every five years.  1/2 to 2/3 of their growth is to come from acquisitions.

From their 10-K, this is what they do:

Products and Services     AMETEK’s products are marketed and sold worldwide through two operating groups: Electronic Instruments (“EIG”) and Electromechanical (“EMG”). Electronic Instruments is a leader in the design and manufacture of advanced instruments for the process, aerospace, power and industrial markets. Electromechanical is a differentiated supplier of electrical interconnects, precision motion control solutions, specialty metals, thermal management systems, and floor care and specialty motors. Its end markets include aerospace and defense, medical, factory automation, mass transit, petrochemical and other industrial markets.

Competitive Strengths 

Management believes AMETEK has significant competitive advantages that help strengthen and sustain its market positions. Those advantages include: 

Significant Market Share.    AMETEK maintains significant market shares in a number of targeted niche markets through its ability to produce and deliver high-quality products at competitive prices. EIG has significant market positions in niche segments of the process, aerospace, power and industrial instrument markets. EMG holds significant positions in niche segments of the aerospace and defense, precision motion control, factory automation, robotics, medical and mass transit markets. 

Technological and Development Capabilities.    AMETEK believes it has certain technological advantages over its competitors that allow it to maintain its leading market positions. Historically, it has demonstrated an ability to develop innovative new products that anticipate customer needs and to bring them to market successfully. It has consistently added to its investment in research, development and engineering and improved its new product development efforts with the adoption of Design for Six Sigma and Value Analysis/Value Engineering methodologies. These have improved the pace and quality of product innovation and resulted in the introduction of a steady stream of new products across all of AMETEK’s lines of business. 

Efficient and Low-Cost Manufacturing Operations.    Through its Operational Excellence initiatives, AMETEK has established a lean manufacturing platform for its businesses. In its effort to achieve best-cost manufacturing, AMETEK has relocated manufacturing and expanded plants in Brazil, China, the Czech Republic, Malaysia, Mexico, and Serbia. These plants offer proximity to customers and provide opportunities for increasing international sales. Acquisitions also have allowed AMETEK to reduce costs and achieve operating synergies by consolidating operations, product lines and distribution channels, benefitting both of AMETEK’s operating groups. 

Experienced Management Team.    Another component of AMETEK’s success is the strength of its management team and that team’s commitment to improving Company performance. AMETEK senior management has extensive industry experience and an average of approximately 23 years of AMETEK service. The management team is focused on achieving results, building stockholder value and continually growing AMETEK. Individual performance is tied to financial results through Company-established stock ownership guidelines and equity incentive programs.

Business Strategy 

AMETEK is committed to achieving earnings growth through the successful implementation of a Corporate Growth Plan. The goal of that plan is double-digit annual percentage growth in earnings per share over the business cycle and a superior return on total capital. In addition, other financial initiatives have or may be undertaken, including public and private debt or equity issuance, bank debt refinancing, local financing in certain foreign countries and share repurchases. 

AMETEK’s Corporate Growth Plan consists of four key strategies: 

Operational Excellence.    Operational Excellence is AMETEK’s cornerstone strategy for improving profit margins and strengthening its competitive position across its businesses. Operational Excellence focuses on cost reductions, improvements in operating efficiencies and sustainable practices. It emphasizes team building and a participative management culture. AMETEK’s Operational Excellence strategies include lean manufacturing, global sourcing, Design for Six Sigma and Value Engineering/Value Analysis. Each plays an important role in improving efficiency, enhancing the pace and quality of innovation and cost reduction. Operational Excellence initiatives have yielded lower operating and administrative costs, shortened manufacturing cycle times, higher cash flow from operations and increased customer satisfaction. It also has played a key role in achieving synergies from newly acquired companies. 

Strategic Acquisitions.    Acquisitions are a key to achieving the goals of AMETEK’s Corporate Growth Plan. Since the beginning of 2010 through December 31, 2014, AMETEK has completed 26 acquisitions with annualized sales totaling approximately $1.4 billion, including five acquisitions in 2014 (see “Recent Acquisitions”). AMETEK targets companies that offer the right strategic, technical and cultural fit. It seeks to acquire businesses in adjacent markets with complementary products and technologies. It also looks for businesses that provide attractive growth opportunities, often in new and emerging markets. Through these and prior acquisitions, AMETEK’s management team has developed considerable skill in identifying, acquiring and integrating new businesses. As it has executed its acquisition strategy, AMETEK’s mix of businesses has shifted toward those that are more highly differentiated and, therefore, offer better opportunities for growth and profitability. 

Global & Market Expansion.    AMETEK has experienced dramatic growth outside the United States, reflecting an expanding international customer base and the attractive growth potential of its businesses in overseas markets. Its largest presence outside the United States is in Europe, where it has operations in the United Kingdom, Germany, France, Denmark, Italy, the Czech Republic, Serbia, Romania, Austria, Switzerland and the Netherlands. While Europe remains its largest overseas market, AMETEK has pursued growth opportunities worldwide, especially in key emerging markets. It has grown sales in Latin America and Asia by building, acquiring and expanding manufacturing facilities in Reynosa, Mexico; Sao Paulo, Brazil; Shanghai, China; and Penang, Malaysia. AMETEK also has expanded its sales and service capabilities in China and enhanced its sales presence and engineering capabilities in India. Elsewhere in Asia and in the Middle East, it has expanded sales, service and technical support. Recently acquired businesses have further added to AMETEK’s international presence. In recent years, AMETEK has acquired businesses with plants in Germany, Switzerland, the United Kingdom, Serbia and China as well as acquired domestically located businesses that derive a substantial portion of their revenues from global markets. 

New Products.    New products are essential to AMETEK’s long-term growth. As a result, AMETEK has maintained a consistent investment in new product development and engineering. In 2014, AMETEK added to its highly differentiated product portfolio with a range of new products across each of its businesses. 

And from the annual report, a snapshot:

It looks pretty impressive. Nice growth, and new highs after the 2008/2009 recession pretty quickly.  I dug up some figures going back to 1999 when Hermance became CEO to see how he has done, and it is pretty impressive:

Financial Summary of AME since 1999

Net sales grew 10%/year since 1999 while operating income grew around 15%/year, and EPS around 16%/year.

As with DHR, free cash flow has been higher than net income throughout the period by around 1.2x.

The interesting thing about AME is that these figures are not "adjusted" or anything like that.  Unlike, say, VLX, AME's EPS is plain EPS.

As of the third quarter, guidance for the full year 2015 was $2.55/share, up 5% over 2014.  With the stock at around $54/share, it's trading at a P/E of around 21x.

Conclusion
AME does seem to be facing some macro headwinds.  Oil and gas hasn't been too much of an issue as they don't have that much exposure to upstream, but slowing growth in Asia and emerging markets are holding back their growth this year and probably into next year.  So there is some risk there.

The stock is certainly not for cheapskates at 21x P/E, but they do have good free cash flow conversion and growth potential.  Their operating margins are higher than say, DHR or CFX too (with similar business models).   AME isn't leveraged at all, either, with long term debt of $1.6 billion against 2014 EBITDA of $1 billion.  With the junk bond market tanking and rates going up, this may be a good thing.

There are plenty of 20+ P/E stocks with very little growth prospects (and the whole market at close to 22x P/E), maybe this is not a bad idea.  Historically, AME has traded at around 20x P/E.

Superinvestor Portfolio Winners and Losers

This is sort of just an administrative post:  I added to the 'pages' section a winners and losers sort of the Superinvestor portfolios.  This, I guess, is the companion to the Superinvestor screens.

It's just sorts the stocks in the portfolio by year-to-date returns.

I'm guessing with all of the volatility in the markets these days, this would make an interesting browse for some people.  

This is all just part of my recent hobby (coding), so I am doing this for fun; to see what it feels like to actually get some coding stuff into 'production', and see if I can make it as automated as possible so I don't have to do anything etc.

Superinvestor Portfolio Winners and Losers