As we closed the quarter, US markets had their best quarterly performance since 2008. Not bad considering the devastation we witnessed when COVID19 broke out. However, the bounce is not spread out evenly against all sectors or stocks.
Technology related stocks performed the best, partially because they were not affected by the pandemic, partially because they were a beneficiary of it. However, most stocks did not benefit and even more have seen losses rarely seen by most of us.
The problem with the market currently is that within the technology space, most stocks are either extremely expensive, or borderline bubble territory. In fact, most of the technology space today is simply not investable by almost any valuation method.
Then there is another very big percentage of the market that is very difficult to invest, because the COVID19 pandemic is still in play and we simply don’t know to what extent these companies will be affected (or not). Most stocks in this category are fairly valued, but we have to wait to see to what extent the pandemic has affected them. More clarity is needed for this category, and we will get this clarity after Q2 results get published.
And then there is another batch of stocks that either haven’t been affected, or have been affected very little, yet trade for scrap and no one is buying them. Yes, this is where the real value is, especially in the small cap space, but they can’t seem to get a bid.
Investors dilemma for Q3
So, the question is, do you buy in the technology game (in essence momentum trading) hoping the sky doesn’t fall under you, or do you buy stocks that have the potential to increase in value, but are out of favor?
It’s a difficult question to answer these days, because the technology trade has been successful for a while now. At the same time it’s very difficult to invest in many of these companies when one considers the balance sheet and the valuation (market cap) when you manage money for a living. Simply put, from an active manager’s perspective going with the flow and trading technology is not easy to do.
We think the easy money has been made during the last quarter’s bounce. There are simply too many variables and unknow factors to buy stocks blindly simply because they are in style, or because everyone else is doing the same.
So, we will keep doing what we know best, buying stocks that have value and can perform under difficult situations. Because when there is room in the balance sheet for error, eventually stocks bounce back. However, when the balance sheet is in question, and the sky falls under you, it might be a very long time before you recover.
Either way Q2 result will probably be worse than Q1 and investors have to be extra careful. And buying a good balance sheet, at a fair valuation, is always a recipe for prudence.
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