THE ISSUE WITH
COMEBACKS
GOODBYE YOLO BRICK ROAD by Tim Melvin & Garrett Baldwin
Forget meme stocks and overcome the fear of missing out (FOMO). Come back to basics. Here are four time-tested investment strategies.
A
s valuation compression continues for growth stocks in tech and communications, active investors should come back to four “boring” strategies to make real money. Market fundamentals might not matter much on the way up, but they do on the way down. Investors in growth stocks and you-only-live-once (YOLO) assets, including technology and communications stocks popular during the pandemic, have one last chance to avoid the fallout. Turning the odds in one’s favor requires time, patience, diligence and strategies that don’t correlate with what the crowd is thinking. Luckbox digs into four strategies that have yielded sizable returns in non-YOLO markets dating back more than a decade. First, a little on the history of value compression—that means a company’s earnings are increasing but the price of its stock isn’t moving. Much like during the dot-com crash, some companies have declines in price-to-earnings, price-to-sales and other metrics, even though they maintain strong profits and improved balance sheets. As a result, investors aren’t willing to pay a higher premium for equities.
CHARTING VALUE COMPRESSION The chart on the opposite page tracks the history of the Shiller PE ratio, which measures the average price-to-earnings ratio for S&P 500 stocks. As of May 1, the Shiller PE ratio stood at 32.5, well above the historical average of 17.35 (1900-present). A further decline feels inevitable as the Fed begins to tighten its balance sheet by selling its war chest of bonds and mortgage-backed securities. The Fed’s liquidity drain will likely create more volatility, selling and valuation compression. As a result, active investors may want to consider timetested investment strategies in what continues to be an unpredictable market.
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5/13/22 11:59 AM
