Value Library

The following is an excerpt from the ABC Perspective - July 2011 - Pg. 1

Déjà vu…Again

As I sit down to write our July 2011 ABC Perspective, I have an incredible sense of déjà vu. Exactly one year ago, North American equity markets were going through excessive turmoil with numerous common stocks trading at incredibly low valuations. Moreover, there was a growing crescendo of negativity leading many investors toward spreading consternation and inaction.

My specific comments at that time were:

Amidst the current extreme stock market weakness and investor confusion, largely a result of “double-dip recession” fears, a number of fundamentally undervalued stocks have been severely punished. In numerous cases these price declines appear to be less a result of a surge in selling but rather a direct result of a general buyer’s boycott. Interestingly, with stock trading volumes considerably lighter due to rising economic fears combined with the expected summertime seasonality it doesn’t take much buying or selling to generate excessive price volatility.

Yet, despite the considerable sidelined cash reserves impatiently waiting to be invested, it appears many investors have decided to bide their time until the financial outlook becomes less murky.

It is our view that the recent momentous market decline is and will continue to offer excellent purchase and stock trading opportunities. Furthermore, from a contrarian stock picker’s perspective, the present uncertain atmosphere is creating an excellent environment in one’s hunt for value.

Surprisingly, not a lot has changed today. More importantly, one should recall that the tremendous summer of 2010 investment despair led to a remarkable stock market bull run from July 2010 to early winter 2011. The truth of the matter is that our investment view remains virtually unchanged from 12 months ago.

We continue to believe that North American economies are slowly but surely improving, company balance sheets are in relatively good shape, and that selective common stocks are unquestionably cheap.  In fact, it is our view that the most recent economic downturn may have resulted in corporations placing greater attention to their cost structures, such that relatively high levels of unemployment may not be a sign of economic weakness, but rather improving levels of productivity. 

Despite the current market confusion, we maintain our view that both the North American economy and common share prices will sawtooth their way higher for the balance of 2011. Our optimism is based on several factors, including: record low interest rates combined with continued monetary and fiscal stimulation; improving corporate earnings and strengthening balance sheets; pent-up consumer and corporate demand for goods and services; trillions of dollars of cash anxiously awaiting equity investment combined with increased mergers and acquisitions and corporate share buybacks.

Although we anticipate periodic short-term market sell-offs, we view any market weakness as temporary, all within the context of a continuation of the 2009-2011 bull market recovery.

Irwin A. Michael, CFA