September 18, 2020

Undervalued Is Not the Same as Cheap

Selling stock that is overbought is not the same reason to buy a stock that is oversold. Selling a stock, either in part or whole is generally the outcome a various condition. Perhaps a company has unexpected poor earnings that cause concern or earnings that drive the value above my expectations. If the values level is unsubstantiated by the overall value of the company’s assets, such as we recently see in a few select technology names, or a better opportunity name from the sector or industry comes along that compels a swap. However, it works the sale has purpose that raises capital and capital that is both defensive and opportunistic. But now we come to the undervalued stocks in today’s markets. As we all know how the pandemic has affected the economy, those stocks that represent the sectors and industries most harmed, the current valuations suggest are good buys. But are they? Good value comes in many different conditions. Starting with the obvious fundamental conditions, is the value hurt through a correction of a recent overbought condition. Is the company’s service or product still relevant, is the company weighed down with excess debt, are there growing headwinds from new competition and importantly is the management efficient and productive in their governance? For example, energy companies had seen the decline in oil and gas prices even before the pandemic exacerbated the downtrend. Today those companies seem a potential good buy. But what about their rising competition in renewables, or the excessive debt, or the decline in free cash flow that fed their customary high dividends, the one thing that kept many investors loyal over the years and could easily begin to disappear in the coming years. And industries such as cruise lines and airlines all have adapted changes to their health standards in their respective environments. But with airlines, will it be enough to compel people to fly in the intermediate term. And even when the pandemic ends is it necessarily so that the consumer will want to go back to discomforts of packed flights, endless lines and other conditions that might be headwinds to growth as health conditions have given people a new  lift in terms of health safety measures for every day even in normal times. The point is that a company whose stock is undervalued has numerous reasons to be circumspect of, while an overbought company could have a reason to correct, still be highly valued, but no longer overbought from a technical standpoint. For me, research and the ensuing analysis has a few quantitative variables to consider such as what the global economy is doing, the  domestic currencies are doing, what the economic, political, and cultural climate is represented from the standpoint of confidence. And is strength of competition worth being feared. A lot to take in, but for some of us, sometimes more enlightening (and fun) than it sounds.


This week the behavior of the broad indexes was enlightening but far from fun. For starters, the week began rebounding from last week’s downtrend that left many technical oscillators oversold. But as soon as Tuesday rolled around the economic data showed continuing moderation, the downtrend continued except for a spate of strong Initial Public Offerings (IPO’s) that began with a company known for cloud-based warehousing called Snowflake (SNOW). By the end of the week the video game developer Unity Software (U) arrived and the moves higher in price for both companies was in excess of 50%. A familiar name that is in the works in Airbnb. Worth noting is the recent narrative on the decline that attributes, in my opinion, too much to politics and not enough to the reason for the selling. And a good reason that has been suggested by some institutional sources spoke of the need to raise cash to participate the IPO market and for that reason the lowest hanging fruit are the overvalued, overbought technology stocks.  Also interesting was the revelation that Marc Benioff  (CRM) and Warren Buffet (BRK.B) were early investors in this week’s offerings. This makes sense and suggests to me that a number of those companies have outperformed because of the pandemic, warranting acting as a source of cash, but may have also established themselves as a permanent fixture in the new economic world order. And soon to still be a good buy.

So, as uncomfortable as the markets may seem given the volatility and the external headwinds of politics and uncertainty that cause much of it, for now the potential for a clearer picture is what the  broad indexes need and with patience, will get it. In the meantime, Europe and Asia look interesting and adding to current investments with helpful yields and compelling valuations is the strategy. 

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