My readers are probably tired of my droning on about valuations in the US and abroad (if you’re new here, short summary: US is expensive, and the rest of the world is cheap). While I don’t think the US is in a bubble it is in the top 10% of valuations, which works as a massive headwind to returns in the 3-10 year period. What happens next quarter, or next year is anyone’s guess, but what happens over the next decade is more clear. Call 2013 a gift to US equity owners.
If you are still heavy in US equities (especially small cap and high yield) it is probably a good time to reevaluate…
I’ve been on the record a lot this year talking about how, if you’re going to pursue a high yield dividend strategy, you should consider adding a valuation screen and or a quality screen. Someone asked me about some basic quality factors so I thought I’d list a few below across profitability, leverage, and efficiency:
Note: Currently neither I nor any of my clients own GDX, although that may change in the future at any time. This example is meant to be instructive.
One of the classic technical analysis setups is a simple divergence. Below we look at the SPY ETF (S&P 500). Back in 2008/2009, the market was making lower lows while both the RSI and MACD were making higher lows (shown by thick green lines). That is seen as a very basic bullish signal:
This divergence is also occurring right now in a market that is worth taking a look at, especially since it has been hammered the past couple years. Note that I am not recommending this as a buy, merely pointing out an old technique from the technician’s toolkit. If it keeps going up we will buy some, and if it keeps going down we will wait…:
Readers know about my concerns with overall valuation of US stocks as well as high yield in particular. What else am I concerned about? Small Caps. First is a chart on the historic run of small caps from WisdomTree, then a chart from the amazing Green Book from Leuthold that lays out the valuation argument against small caps relative to the overall market.
Valuewalk has a nice mention of a new recent report from Goldman on buybacks (US Thematic Views, Oct 7th will update with attachment if they give me permission).
In the report Goldman demonstrates how focusing on total cash distributions to shareholders has performed better than dividends or buybacks alone (shareholder yield book readers already know this). Investors in buyback or divided strategies are making the same mistake – namely, ignoring roughly half of how all companies distribute their cash.
A nice chart I had not seen before shows that the number of S&P 500 companies buying back stock has gone from ~40% in 1992 to over 80% today.
Below is the alpha from all three of the strategies, and the tickers you can use to track their baskets on Bloomy:
You often see claims in ads about unbelievable returns in the markets. Even though markets have only returned about 5-10% per annum historically, you see claims of 20,30,sometimes 50% per year. (Or if , you read ads like one I saw this morning on a popular investing website, penny stocks ready to explode from $0.5 to $6!!!)