Rifles are the investment weapons of choice right now on Wall Street. I’m referring to strategies I call “rifle-shots,” because these investors scan the investment horizon through their rifle scopes and only pull the trigger when they spot a particularly attractive stock.
Rifle-shot approaches are different from algorithmic strategies that crunch through dozens of data points from thousands of different stocks to come up with a buy list. Continuing a military analogy, such broad strategies are more akin to carpet bombing than to rifle shots.
To be sure, carpet bombing works well at certain stages of the stock market’s cycle, particularly when prices are rising strongly and individual stocks’ correlations with the overall market are high. That’s not the case so far in 2018 — broad market averages were basically flat for the first six months of the year; the Dow Jones Industrial Average DJIA, +1.31% shed 1.8% while the S&P 500 SPX, +0.88% rose 1.7% and volatility returned.
Rifle-shot approaches tend to dominate this kind of market environment. The newsletter at the top of my performance scoreboard for year-to-date performance — The Turnaround Letter, edited by George Putnam — expects the second half of this year to be more of the same. In the latest issue of his newsletter, Putnam forecasted that “2018 will produce about a 6% full-year return while exhibiting higher volatility than in recent years.” That translates into a 1.9% increase in the S&P 500 from current levels.
Putnam’s average portfolio, according to my performance monitoring, gained 25.7% over the first six months of 2018. He achieved this by carefully analyzing the stocks of companies emerging from a prolonged period of poor performance — often including bankruptcy. The underlying premise of his approach is that such stocks are shunned by investors who can’t look past the companies’ dismal past performance. Sometimes the result is a hidden gem.
The reason to pay attention to Putnam’s outlook isn’t just that he has done well so far this year. His newsletter is in first place for performance over the past 20 years, for example, having outperformed the Wilshire 5000’s total-return index by an annualized margin of 11.2% to 6.8%.
Putnam’s latest recommendation is Blue Apron Holdings APRN, +2.69% , the meal-kit delivery company. Though Blue Apron isn’t a bankruptcy survivor, it definitely has performed poorly, as the stock is trading for around a third of its June 2017 IPO. While acknowledging the many challenges Blue Apron faces, Putnam thinks its stock is now worth the risk. He says the company now is much better-managed and has plenty of cash to outlast many of the less-well-financed companies that recently have entered the industry.
Another newsletter at the top of my year-to-date scoreboard also pursues a rifle-short approach: The Linde Equity Report, edited by Teal Linde. My performance monitoring calculates that his model portfolio has produced an 11.3% six-month return. I don’t have 20 years of results for this newsletter, but over the past 15 years it’s beaten the Wilshire 5000 index by an annualized margin of 13.0% to 9.6%.
I devoted a column last October to Linde’s particular brand of rifle-shooting. The occasion was his recommendation of Equifax EFX, +1.01% in the immediate wake of that credit-rating company’s huge data breach and associated stock plunge. Since that column was published, Equifax has outperformed the S&P 500 by a margin of 17.4% to 9.5%.
Linde’s most recent recommendation is LGI Homes LGIH, +1.43% , a lesser-known but fast-growing U.S. home builder. Linde favors this stock, he says, because even though LGI’s revenue and earnings per share are expected to grow 24% and 37% in 2018, and even though the company has a return on equity of 28%, its P/E ratio based on 2018’s expected earnings is just 8.9.
Still, many investors likely will be underwhelmed by either Blue Apron or LGI Homes. Why take risk on an upstart like Blue Apron, operating in a new industry in which Amazon.com AMZN, +1.66% has also entered, or buy shares of a homebuilder just as mortgage rates are about to climb?
But such is the price you often must pay to pursue a rifle-shot approach. If these companies were obvious prey, they would have already been long picked-off by other stock hunters.
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