This weekend, the WSJ had an interesting article discussing momentum-based technology stocks. Many of these securities have come down by 20-75% over the last several months, as the same momentums that had lifted them higher in the absence of profitability, have now turned against them. For market participants’ that speculated on these securities, betting that the prices would continue to trend higher, the lesson has been costly and painful. Even worse, there is still no margin of safety in many of the names mentioned in the article. These stocks are priced as though they will execute perfectly, despite the countless examples of tech darlings that have been wiped away be increasing competition, or changing consumer tastes.
There is a huge difference between these types of glamour stocks declining in price due to excessive valuations, and stocks such as AIG, C and BAC declining in price due to a short-term earnings miss, or drama with the Federal Reserve’s bureaucratic CCAR process. These financials’ trade at deep discounts to our appraisal of liquidation values, and on exceptionally low multiples to earnings. All three companies have excess capital and are engaging in cost-cutting measures, which have consistently showed positive traction. While there are still issues such as litigation, which aren’t fully resolved yet, any substantial declines in price create an opportunity for us to add to our positions at attractive prices. Unless the facts change and our investment thesis is proven to be incorrect, we feel confident in trusting our analysis despite what anyone else thinks or says.
2013 was a year in which most market participants made money, but not all returns are created equally. When returns are based on speculation, it can be very hard to consistently replicate those positive results across market cycles. By utilizing our deep value investing methodology, our goal is to maximize risk-adjusted returns and avoid permanent losses of capital. Many of these market participants that have bought these momentum stocks will likely be forced into taking permanent losses of capital, which are exceptionally damaging, as opposed to short-term mark to market losses, which we believe to be unavoidable at times. At T&T Capital Management (TTCM), our emphasis is always on the long-term. We wouldn’t chase stocks that we believe are trading at steep premiums to intrinsic value, just because other people are doing it and it will be tough to keep up with other money managers over the short-term unless we expose ourselves to the same risks. Instead our goal is on maximizing risk-adjusted returns over a 5-10 year period, which is why we’ll often use the first year in building positions for new clients’ by selling put options to manufacture cheaper entry prices. Below is a link to the article, which I think you’ll find interesting. Thank you very much and as always, if we can of any service to you, please don’t hesitate to contact us!