Wednesday, April 17, 2013

Volatility is gut wrenching.  The market is constantly trying to seek the "right" price for stocks.  The right price is the value that discounts the future value of a company (dividends, cash flow, enterprise value) using a rate that is commensurate with the amount of risk in those future cash flows.  So, a company like CLX is pretty well understood and, barring malfeasance, should grow it's cash flows in relation to some combination of U.S. and global growth.  The discount rate should be fairly low reflecting low risk relative to the economic growth numbers.

A high tech company would require a much higher discount rate as there is much variation in growth, market share, obsolescence and such.  In this case, there is much volatility as the market tries to figure it out.

From an investor's point of view, volatility can create opportunities.  Market's are constantly trying to react to news and get closer to the "right" price.  Some positive news, however small, has some knock on effect on all stocks.  Conversely, negative news affects all stocks as well.  The trick, I think is to find out which are the babies being thrown out with the bath water.


Here is a well thought out article regarding INTC:
http://seekingalpha.com/article/1348281-intel-valued-as-though-new-technologies-will-bust-but-i-disagree?source=intbrokers_regular


Today, we found out the Cirrus is guiding expectations of future growth much lower.  Since they are a major AAPL supplier, the market supposes that demand for AAPL products is much lower.  That is a reasonable supposition, but our job as analysts is to figure out what the knock on effects will be.  What can be extrapolated and what is just noise.  In addition, we have to overcome the emotional aspects of investment.  It will not "feel" good to buy on a day like today, but that must be our stance.

In my opinion, today's movement down is a reflection of the AAPL effect, but there is no NEW news.  To me, it is perhaps more evidence of what has been my thesis all along that we are in a slow growth environment.

Two areas that I am underweight and looking to add is in the energy and basic materials - mining, chemicals.  This sector has been hurt by the weaker global growth prospects.  That said, I think the market has discounted the scenario and while there may be some more downside, buying a little on a day like today is probably a good thing.   KMI, COP, FCX(new for me), and CLF and VALE (more speculative) are all candidates.

Otherwise, use a little of your dry powder to buy some solid  favorites at a little cheaper price.  GE, PG, and CLX are on my buy list.


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