Tuesday, May 27, 2014

Stocks - The desperate search for value in today's markets

This is just to give a short update on the current situation: I am loaded with funds (the fruits of my work efforts in 2013) and I have done my homework and pre-screened the market for attractive stocks. As I wrote in my previous post, I am ready to pull the trigger. At the same time, I am a bit puzzled about new record stock valuations and the rising number of M&A transactions in the market.

AT&T is currently yielding a bit more than 5%, which is okay, but not the yield on cost I am expecting for such a low-growth investment. In my opinion, this lies more in the area of 5.75%-6.00% in line with management guidance as to at which price they would start buying back shares. In addition, there is also uncertainty with regard to the added value of AT&T’s recent USD 49bn-acquisition of DIRECTV. Impact on shareholder value of the transaction is not so clear to me and a price of USD 49bn is anything, but cheap. In fact, mergers and acquisitions are often rather value destroying instead of value enhancing for shareholders of the acquiring company. At current market valuations, I could well imagine that AT&T is paying way too much in any case. That said, this investment at given yield seems not so attractive to me at the moment.

Next company on my watchlist was Pfizer. At least it was before the latest announcements in the news. Originally, my rule of thumb was to start adding at a yield on cost of 3.5%. Then I read about the lack of growth and the negative Q1 results. Given the sheer size and profitability of the company, the stock still seems okay to me and therefore this info is not a deal-breaker per se. I still feel confident in Pfizer’s research and management capabilities and the fundamentals of the company remain rock-solid. What is more worrisome is the current M&A activity in the sector. A lot of companies are currently looking for an-organic growth opportunities. Prices discussed for recent acquisition targets are beyond good and evil and, unfortunately, Pfizer is leading the magnitude of outrageous take-over offers with a final USD 106bn-offer for AstraZeneca. No matter if the deal is ever going to be signed, the impact on shareholder value and the company's fundamentals could be huge. Against this background, I am not really positive about the stock and its prospects anymore. So this is not an option at the moment.

Next one on my list is HCP or Capitamall Trust. Both companies are REITs and my rule is to start adding at a yield on cost of 5.5%. Aside from the fact that this yield seems currently out of reach, I feel that I should rather start adding blue chips to my portfolio instead of increasing the share of REITs. However, due to the lack of other investment opportunities I feel that picking one of the two is a satisfactory option. Therefore, they remain as a priority pick on my watchlist.

Unilever
was another option on my list. Not long ago Unilever was considered cheap: In February, the price came close to EUR 27 with the stock offering a yield of approximately 4%. However, the picture has changed in the meantime and the stock is now close to EUR 32 offering only some 3.5%. This entry price is too high to me and hence I am waiting for the next correction.

Next one was Allianz, BASF, and Munich RE. Similar to Unilever, all options have ceased due to the DAX (and with it the three stocks mentioned) reaching new highs in the last trading days. As annual dividend payment dates for all three stocks have passed in the meantime, it doesn’t make sense to add now and wait for another year to receive the dividends. Much could happen during this time. To me, particularly the price of BASF is entering highly speculative territory and I wonder how much higher the price is going to get. That said, all stocks are currently no longer options.


Now, what conclusion can I draw from my thoughts above? Blue chips are currently more expensive than ever before. It is getting more and more difficult to find value in the market. In my opinion, there are clear signs that there is an asset bubble in the market. This might be the time to lean back and wait for the next correction. On the other side, there are no alternatives to stocks as the ECB is expected to release another landmark in the history of monetary policy during the next days. The next announcement is likely to pave the way to even higher market records as Draghi seems to be willing to fight the deflationary tendencies within the Eurozone. I am a bit clueless what I should do, but will keep you posted about any portfolio developments.



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