Turnaround Investing Blog

George Putnam, one of the country's leading turnaround and distressed investing professionals, shares his timely insight on the economy and turnaround investing opportunities.

Bonds

Mid-Year Stock Market Update

Excerpted from the July 2015 Issue

So far in 2015 the large-cap portion of the U.S. stock market has traded in a relatively narrow--and rather symmetrical--band. The widely followed S&P 500 Index was up only about 0.2% for the first half of the year, with a high for the year of +3.7% and a low of –3.8%. These returns are without dividends, which would add about 1.0% to the S&P returns. Incidentally, all of these calculations also pre-date the most recent Greek debt-related fallout and NYSE trading disruptions on July 8th.

According to a market analysis group cited in Barron’s, that is the narrowest first half trading range in the history of the Index. Moreover, there have only been three years--1952, 1993 and 2004--during which the Index had not been up or down by at least five percent at some point in the first six months.

As is often the case, the market sectors that were laggards last year have outperformed this year. Small-cap U.S. stocks, as measured by the Russell 2000 Index, lagged the S&P 500 last year by more than eight percentage points, but this year the small-caps are beating the S&P by about four percent. Similarly, foreign stocks, as measured by the MSCI EAFE Index, which were down 6.3% last year, are up about 3.8% so far in 2015. Emerging market stocks have been about flat for the year so far. 

On the whole, the bond market has been soft over the first half of the year as investors wait for the Federal Reserve to raise interest rates. The Barclays U.S. Aggregate Index, which measures a mix of government and corporate bonds, is down 0.1% for the year to date. High yield bonds have fared better than we expected so far, gaining 2.5% as measured by the BofA Merrill Lynch High Yield Index. It is worth noting, however, that in 2014 high yield bonds had a good first half but gave back most of their gains in the second half.

So, where do we go from here? In the January issue, we predicted that the S&P 500 would gain four percent for the full year (read the full article free of charge here); and we don’t see any reason to change that forecast now. While the stock market is likely to remain uninspiring for the rest of the year, to us it still looks like the best game in town. High quality bonds could be volatile when the Fed finally does raise rates.

As discussed in the most recent issue of The Turnaround Letter, we expect to see more defaults in the high yield bond universe, which is likely to hurt returns in that asset class. The stock market’s narrow trading band may have sapped the enthusiasm from some investors, but given the lack of alternative places to invest right now, we think there will be enough demand to push stocks a little higher from here. In addition, we expect the economy and corporate earnings to remain relatively strong for the next several quarters. 

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Amazon = US GDP 1970

Amazon joined Apple in reaching a $1 trillion market capitalization. $1 trillion is about the same as the total value of New York City property and the total value of loans at JP Morgan, the nation’s largest bank in terms of assets. Jeff Bezos’ $160 billion stake would place him (personally) as the #33 largest company in the S&P 500 in terms of market cap, next to Coca-Cola, Disney and Netflix. We aren’t bold enough to predict whether the shares will continue upwards or if they are in a bubble reaching maximum inflation. Setting aside for a moment their investment prospects, let’s admire the truly remarkable milestone that these two companies have reached. Read More.

EV/EBITDA: What Is It & Why Are We Using It More?

In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple.  We thought it might be useful to describe this measure and why we like it.

Read More.

Turnaround Letter Stock Pick Named Top Performer of 2017

 

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What Last Year's Top Stock Pickers Are Buying in 2018

 

This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.

 

George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."