As I have warned all summer, the noise from the news just keeps getting louder.
It was bad enough to have a weak jobs report and a GDP report that was misinterpreted by the media almost immediately. For the record, when you back out the decrease in imports, the GDP was relatively weak.
In case that was not enough, President Trump’s reaction to all the news sent the media into overdrive. Add in a racy blue jeans commercial that inspired ridiculous responses from a large portion of the country and Senator Elizabeth Warren taking a tumble on the Senate floor when she leaned against a desk that collapsed. Then there was the mandatory dose of Epstein headlines and warnings of an AI apocalypse that allegedly lingers just over the horizon. I’m surprised anyone can sleep at night with all the racket.
As fun as this all is, as far as your investments are concerned, it’s still just noise.
To make money, follow the numbers, which are very clear about where you should be investing at this time.
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The only thing more stunning than the news itself is the immediate frenzied efforts of the Instant Experts of the Internet to turn the ruckus into an investment strategy of sorts. According to them, this is either the apocalypse, and only gold coins carefully stored in a vault somewhere in the hills of Idaho will save you, or you need to load up on call options on unprofitable companies whose founders once knew someone named Al Isleworth, making them AI experts.
Either way, the only way to protect your family from the apocalypse or keep them from being left behind is to act now, according to these Instant Experts.
Or you could ignore the noise and trust the numbers.
Please don’t get me wrong. At heart, I’m a political junkie and highly entertained by all the current shenanigans. The only thing that could make this more entertaining would be to have Hunter Thompson and P.J. O’Rourke manning the National Affairs desk at Rolling Stone magazine. Weekly op-eds by Milton Friedman in The Wall Street Journal and Paul Samuelson in The New York Times heatedly debating economic policy would add a nice dash of spice to the mix as well.
When it comes to investing, however, I am always mindful of one critical fact: Everything shows up in the fundamentals and price.
The companies that lead the way in technology will have very high rates of sales and earnings growth and produce gobs of cash flow. There is no need to gamble on the ifs, buts, and maybes. The winners will show themselves through operating performance. The losers, as has been the case in every major technological advancement, will fall by the wayside.
For the better part of the year, the CAPE Ratio, the Excess Yield on the CAPE Ratio measurement, the aggregate Investor Allocation to Equities, and Market Cap to Gross Domestic Product all suggested that the broader market was nearing extreme valuation levels.
At the same time, High Yield Credit Spreads and the VIX have been acting like teenagers sneaking away from camp to skinny dip in Crystal Lake. There are no signs of fear and only a hint of common sense.
The number of stocks trading above their 5- and 20-day moving averages began falling sharply almost two weeks ago from relatively high levels. Those are usually numbers that at least scream for caution.
While everyone clusters around a small handful of large-cap tech stocks and whatever the hot story of the day is, the numbers are telling a story of bargain opportunities in small-cap deep-value stocks.
While something very close to the majority of small-cap stocks are garbage, there are a lot of great businesses being overlooked by the market. In the world of indexing and passive investing, small-cap stocks have underperformed significantly for an extended period. Therefore, the common “wisdom” has become that all small-caps are bad.
The last time value underperformed compared to growth stocks was right before the Internet bubble popped. Once everyone gave up on the little guys, we saw an epic 16-year rally in small-cap stocks. The stage appears to be set for this to happen again.
The key to uncovering the real opportunities is taking out the trash. Eliminate all the small companies with no profits. Throw out the ones with too much debt. Skip the ones that are, as the old cowboy always warned, “all hat and no cattle.” Stories are for campfires and bedtimes. The ones that are left should be a fertile hunting ground.
If history is any guide, these companies will also be a fertile field for M&A activity.
NACCO Industries (NYSE:NC) is a great example of a small-cap deep-value opportunity. Best of all, in addition to being in the overlooked small and deep value camps, it is also in one of the most hated industries in the country: the coal business.
In fact, NACCO operates coal mines and holds oil and gas royalty properties. Most of their coal is thermal, which is sold to utilities for use in electricity generation. It has over 63,000 net acres of oil and gas properties in some of the most active fields in the United States, earning royalties.
NACCO is also involved in the Thacker Pass Lithium mining project along with Lithium Americas and GM.
The company is not only profitable but is growing earnings and cash flow. In May, NACCO increased its dividend by 11%. The stock currently trades at just 67% of tangible book value. They have very little debt and plenty of cash on hand to keep the bills paid.
Indirectly, NACCO is an Artificial Intelligence play. AI requires energy. Coal is still used to produce electricity. If electricity demand increases, coal demand will also increase. If coal demand increases, NACCO’s profits will also rise.
Enjoy the political theater away from the market. But when it comes to your investments, follow the numbers.
Editorial content from our expert contributors is intended to be information for the general public and not individualized investment advice. Editors/contributors are presenting their individual opinions and strategies, which are neither expressly nor impliedly approved or endorsed by Benzinga.
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