Profitable Investing Goes Well Beyond Picking Winners

American markets today, Friday, viewed several hours before the 9:30 a.m. EST opening, appear poised for a negative start with all major indices in the red. The S&P 500 is trying to climb into the green and might struggle into it during the morning.

That follows yesterday’s very mixed closing with the Dow down 0.19%, while the S&P 500 climbed by 0.13% and the NASDAQ climbed by 0.11%. The Dow had been swinging back and for during the day and an observer could be forgiven for wondering where the market was going.

Amongst the bricks-and-mortar winners directly profiting from the vaccination campaign yesterday, Macy’s Inc. closed at $21.61, up $3.53 on the day after projecting full-year net sales of $23.55 billion to $23.95 billion. Kohls Corp. closed at $55.64, up $3.79 on the day with net sales at $4.22 billion up from $3.21 billion in the second quarter ended July 31.

Investors and analysts continue weighing the economic rebound, Covid surges and wondering about the next move of the Federal Reserve Bank. A drop in the number of Americans filing new claims for unemployment benefits highlighted job growth, though the threat of rising COVID 19 numbers continues to pose a threat to the economic recovery.

Meanwhile, a call by Republican Senator Steve Daines for another four-year term for Federal Reserve Bank Chairman Jerome Powell may have lent some strength during the afternoon. Daines told President Joe Biden that another term for Powell would build confidence as the economy improves while facing risks and few would argue with that premise.

For another look at the recovery, John Deere & Co. report third quarter earnings today and the results will show a pull between improved demand for its equipment spurred by the recovery, but with rising costs for materials

Canadian markets look set for a negative start at time of writing.

European markets are open at time of writing and are mixed. The FTSE 100 had been positive but dropped literally as I was assembling this column

Amongst precious metals, gold is improving but silver is down.

Amongst currencies the British pound sterling, Euro and Canadian dollar are all down against the American greenback. The pound is suffering due to weak retail sales, explains Jeremy Thomson-Cook, chief economist at London-based payments specialist Equals Monday. “(It) has fallen to its weakest level against the USD for 7 months this morning following a decline in retail sales in July of 2.5%. he says. “There are a number of reasons why this could have happened; the reopening boost coming to an end, the rise of the delta variant and the European football championships also wrapping up.”

Thomson-Cook adds that further falls linked to Covid 19 surges if people avoid the real-time shopping could occur.

By comparison, the American greenback has found more strength. There is only one king at the moment and that is the USD,” says, adding that equity market movements explain this. “Equity market drawdowns and falling commodities mean one thing and one thing only, a stronger USD as investors look for a safe haven.” That adds to the increased demand for the greenback from investors figuring that the Federal Reserve Bank will start tapering its stimulus.

“In other words, there are two reasons to hold the USD and, in some cases, no reason to hold another currency,” he says.

In previous editions of this column, I have suggested some equities and sectors that merit at least some consideration in investor portfolios. However, even in the recovery some large and well-known names may not deserve hard-earned investor dollars, explains Jay Nash Senior Vice President and Portfolio Manager at National Bank Financial in London. A part of strategic investing is knowing what not to buy as well as what to buy, he says.

Two of Nash’s examples might raise a few eyebrows but he backs them with careful research. In the telecommunications sector he compares A T & T Inc. with Verizon Communications Inc. and Ericsson. Nash says that on a valuation level, AT&T seemed attractive with a low price/earnings multiple and high dividend. “(However) the problem is that it also has the highest payout ratio and lowest return on equity, he explains. “It has to continue servicing some very unprofitable geographic areas and is behind its peers in system upgrades.”

Investors looking only for cash flow may still like A T & T but the stock is trading down on a 20-year basis and its future prospects look limited.

Nash also researched corporations that are investment funds like Berkshire Hathaway. “This was an interesting case to work through as many investors swear by the work of Warren Buffet and I have a great respect for what he has done,” he says noting that Berkshire Hathaway has over $700 billion in assets. That, he says limits its ability to invest because it is difficult for them to get a meaningful position without taking controlling interest in a company.

Investors should see a holding in Berkshire like a holding in a fund he says. “If they line it up against other managers it does not appear to be a top performer and one could suggest it has significant management risks in the years ahead. For these reasons it’s a name I avoid in portfolios,” he says.

The common thread between the two examples is that they both suffer from legacy issues: AT&T services areas on which it loses money and Berkshire is limited by its huge size. Moreover, Berkshire’s current valuation premium is at risk due to the age of Warren Buffett and Charlie Munger.

The moral of this particular story is that profitable investing goes well beyond picking winners. It includes knowing when to sidestep former winners. In this uncertain and volatile market, I’m so often reminded of what the grizzled police sergeant said in Hill Street Blues thirty years ago: ‘Let’s be careful out there.”


Disclosure: I do not own and have never owned any shares in any company mentioned in this column.

Al Emid is a financial journalist broadcaster and author. His next book. The 2022 Emid Report on Volatility provides a map for navigating market tumult and is scheduled for release in January 2022.