Financial Market Macro Overview

by JT McGee

Financial markets in 2011 are looking overcooked.  Value is gone, GARP is disappearing.I wanted to take some time to write a brief overview of the financial markets, leave some thoughts, and post an update about a stock I’ve been watching.

First things first, the stock I’ve been watching, and one I own, is Adams Golf (ADGF). The company is one of the few hardcore value plays I’m happy to have dug up, and as I mentioned in a guest post at InvestitWisely, it’s also a stock I’ve been watching for the growth.

The company recently released its 1Q earnings call, which showed earnings of $.50 per share compared to the year ago period of $.21. This surge is exceptional, and I’m happy to see that investors haven’t completely priced it in at $6.33 per share. Unfortunately, with little volume and bids in at $7.10, I think we’ll be seeing higher prices on Wednesday open.

At any rate, this was a stock I picked up because it sold for substantially under book (Nothing compared to those scary low valuations in 2009) and because the company has been on a slow path to tearing up the recreation space. Now that it has acquired another company—Yes! Golf—I’m even happier to own it.

Going forward, I expect another killer earnings call in the second quarter, and I can’t wait to see what Yes! Golf’s supply chain, intellectual property, and other goodies do for Adam’s in 2012. I will continue holding for some time. Comparable companies/quarters–the only pricing models worth your time–tell me Q2 should be just as good.

Domestic and Global GARP

Internationally, I’m interested in GARP just as much as I’m interested in value in the United States. Unfortunately, growth is now hard to find at a reasonable price, and my pro-GARP plays like Vietnam—excellent demographics, great exporting companies, and one of the countries with the least political risk in Asia—just aren’t up to par. If I can’t get growth cheap, I don’t want it. I especially don’t want it with China tightening on the monetary policy end.

I’m including the US markets in the GARP section because, as Sam noted in his post about his own portfolio, the markets are overpriced at best, and fairly valued at worst. With the S&P tearing toward forward earnings ratios of 15, there isn’t much spread between the long-end of the yield curve and corporate earnings. When you inject the convexity potential of the bond markets into the stock market, you get a market that I don’t want to participate in. Nuh-uh, no way, not with tightening on its way.

After all, most plays now are anti-dollar, pro-leverage, and unsustainably bullish. Recent market action in silver, coupled with a deleveraging in commodities market-wide, and rising 10-year Treasury bond prices tells me the smart money is cutting back on beta after finding plenty of alpha. I suppose that’s why I can’t find GARP :-/

Going forward

Next Monday I’ll be profiling another stock here, but this time it will be in the boring business of P&C insurance. This company, a favorite of mine, is also a micro-cap company, though one with excellent dividends but also the low liquidity that Adam’s Golf has.

It also sells for a 30% discount to book value, which is, to me, like buying $3 with $2. I can dig it!

Most companies I want to own are low liquidity. A lack of liquidity is the ultimate gift to the individual investor because the institutions cannot buy in. Without institutional investors, you’re left with securities that are priced by average folk, and I’d much rather put my financial knowledge to a market with 50-year old suburban men than against the high-frequency super computers that play in the more liquid markets.

That said, low liquidity means that prices are volatile, the stock may sit undervalued for a very long time (who cares if you’re a net buyer?) and that you may lose your shirt if you cannot exit. When you buy low-liquidity issues, you sure better not care about the daily—or even monthly!—changes in price.

Sometimes I wonder how many directions I can take this blog. 😉

Full Disclosure: Long ADGF, and the P&C company I’ll be posting about on Monday. These are long-term positions, neither of which I plan to add to or reduce in the next 30 days.

P.S. This is Wednesday’s post, even if it goes up on a Tuesday. I’ll post a roundup on Friday to make up for it. 😛

Photo By JD Hancock.

{ 2 comments… read them below or add one }

jeff May 4, 2011 at 22:24

JT,
I like how you pointed out that low liquidity is something to take advantage of if your investing for a long time in a company. In regards to what direction this blog should go, keep talking about stocks. I’ve focused more on stocks and corporations, it’s fun and self educational.

Reply

JT McGee May 5, 2011 at 00:34

Always been a pet peeve of mine that individual investors get pushed away from small cap stocks with low volume. Those kind of issues are the only ones where individuals have a routine advantage against the institutional investor. I’ll probably work more posts about the financial markets; they’re probably my #1 real serious interest, but I buy so few of the companies I research that any post would be few and far between. Maybe I’ll double down next week with one article related to the specific company I like, and then another on a whole industry that continues to drive me mad. :O The suspense!

Thanks for stopping by 🙂 I appreciate the input.

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