The answer is “Yes.” I had a great math teacher in high school. The course was Algebra 3/Trigonometry. After teaching a lesson he would often say: “Is it algebra 3 or trigonometry?… Yes.”
Most people will talk about stocks as a whole and ask questions like “should I be buying (or selling) stocks right now?” While there are times that stocks move lock-step, there are often large disconnects between different industries, different countries and different size companies. This is why I drill down to pick individual stocks instead of investing in the market as a whole. Some stocks are starting to run their course, so I’ve been selling, others are offering great buying opportunities. The stock market is becoming very bipolar (down 1.5%, up 2% the next day, down 2% the next) and can’t seem to make up its mind. This is what I’ve been concerned about going back to July (see here and here) when the breadth of the market rally started to fade (the breadth can be thought of as the number of stocks participating in the rally across the entire market). The higher volatility is also right on cue with the Fed ending Quantitative Easing (QE) this month. The good news, for all of my clients out there, is that I’m always prepared to take advantage of such a situation. It’s the repositioning done during these times that sets up your gains for the next year.
Has your portfolio dropped a little in value? Yep. Anyone planning on cashing-out everything today? Nope.
This is why I welcome and look forward to drops in the stock market. It allows me to reposition your holdings and take advantage of great stocks that are being dragged down with everything else. It might take a little reprogramming of the way you think about the direction of the stock market but it can be done over time with practice. Just try to keep in mind that the small drops today setup your gains for later.
One example of these opportunities is Precision Castparts (PCP). I’ve been adding to our position aggressively as it’s come down. Precision Castparts is a maker of metal components, forgings and castings for various industries but primarily aerospace, which happens to be in the early innings of a major upgrade to airplane fleets around the world creating a 10+ year backlog for many of the manufactures. Boeing has been talking about this for about 2 years now. But it’s not just companies like Boeing that benefit. All of the companies that produce the parts that Boeing buys to build an airplane also benefit – like Precision Castparts.
Alcoa, the global aluminum producer, just reported earnings on Wednesday. They’re usually one of the first companies to report each quarter and they’re a great company to follow because they supply aluminum for so many different industries, like aerospace, automotive and construction. By listening to where Alcoa is seeing demand, we can get a feel for the areas of the economy that should do well over the coming quarters. In particular, Alcoa again pointed to the strength coming from aerospace orders and noted the 9 year backlog they’re seeing. This gives me even greater conviction in buying Precision Castparts right here.
There are quite a few companies we could pick from that should benefit from the aerospace cycle but PCP is my favorite for a few reasons. Over the last decade, the CEO has done about 20 different value-adding takeovers, they just began repurchasing stock last year and announced a $1 billion share buyback over the next 2 years (plus I’m expecting free cash flow moving forward to be diverted to additional buybacks), and they’re sporting a very attractive valuation. This is the trifecta of what I look for in long-term stock investing: attractive valuations, stable/growing cash flow for years to come and smart capital allocation policies by the CEO.
Investing in stocks is about buying the right companies at great prices. When viewed in this light, I hope PCP continues to fall over the coming weeks! The lower it goes, the more I buy and the better your future returns.
Precision Castparts (PCP) – 1 year
Thanks for following and have a great weekend!
-Nick
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