Time to Panic or Buying Opportunity ?
Posted on 07. Aug, 2011 by TheFreeInvestor in General, Portfolio, Stock Analysis
Phew… last week was a wild wild week in the market. It started with the debt ceiling drama and ended the week with worst drop since March 2009. The drama didn’t end there… late Friday S&P downgraded US debt for the first time in 70 years. You can read the details on almost every financial newspaper/blog ! So, I will not repeat it here again.
For long term investors like me, it is important to keep things in perspective. As painful as it is to see all the holdings in the portfolio drop sharply, no correction/recession lasts for ever. Market condition was much more volatile and gloomy during the late 2008 to mid 2009 period. However, in the next 2-3 years, the returns were phenomenal despite the fact that I added very few new positions in that period. As long as the long-term investment thesis of the companies hasn’t changed significantly, there is no need to panic about wild swings in the market.
Cash is King… Ammunition During Market Correction
Before the 2008 crisis, I was fully invested and did not have additional cash to invest when the market fell sharply in late 2008. However, this week when the market started going down sharply, I had a significant chunk of my portfolio in cash. Using the market downturn as an opportunity, I started building on my partial positions to full positions for the following stocks: ARO, BRK.B, DISCK, FDX, and NOV. Here is a quick note about these stocks:
Aeropostale (ARO): Troubled teen retailer Aeropostale announced lousy same store sales numbers (-14% in second quarter) last week and the market rewarded it with a swift ~25% drop in stock price. The operational challenges that the company is facing are real — bad merchandizing and across the board discounting by all retailers in the teen segment. But, the current market price at PE of 5.67 seems to suggest a permanent impairment of the business. I am hoping that the management team can right the ship. So, added fee more shares to my existing position.
Berkshire Hathaway (BRK.B): Berkshire Hathaway is trading at one of the lowest Price to Book ratios in many years. Right now P/B is less than 1.1. The operating businesses seems to be doing well. There is some short-term pressure on the insurance businesses. But, that’s just the normal course of insurance business. The book value of Berkshire assets understate the intrinsic value of the stock. At current prices, the downside (with or without Buffet) seems to be limited. Tilson Fund has a great analysis of Berkshire’s value. Though I am skeptical of the Berkshire business model after Buffett leaves the helm, the current price is too compelling to ignore.
Discovery Communications (DISCK): Discovery continues to chug along well. There was no big surprise in the quarterly report. International segment grew at 20% and US at 6%. Management continues to buy back class C (DISCK) shares. I still believe the long term story of Discovery as a brand and worldwide appeal of it’s content. I reduced my cost basis by buying few more stocks in this depressed market. I am keeping an eye in their new ventures HUB and OWN channels.
Federal Express (FDX): The company continues to reinvest in its business worldwide. There is no significant change to the original thesis for investing in FedEx. It has a healthy balance sheet with manageable level of debt and $2.3 billion in cash and short-term investments. I like that Fred Smith (founder) still runs the company. I added to my existing position and lowered my cost basis.
National-Oilwell Varco (NOV): Market punished National-Oilwell Varco along with the entire oil and gas sector. As per the latest earning call, NOV’s backlog book looks pretty healthy and they continue to see strength in the market. The upgrade cycle of rigs are unlikely to stop unless there is a strong economic downturn again. As the stock price fell from $83 a couple of weeks ago to $67, I used the opportunity to add few more shares to my existing partial position.
Looking Ahead
I have no idea what will be the market reaction tomorrow to the S&P downgrade of US credit. Is this the bottom or the market is going to fall more? I will let the market pundits make those prediction while I will watch the drama from sideline and keep my shopping list ready just in case my favorite stocks go on deeper sale. My watchlist is a good way to keep an eye on the market !
(Disclosure: As of the publication of this post, I hold long position in ARO, BRK.B, DISCK, FDX and NOV. Please read the full disclaimer on the blog.)
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