We just learned Warren Buffett isn’t jumping on this market weakness. Should we be worried?
It was back in 1987 when Warren Buffett laid out his now-famous market strategy …
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Today, despite the market’s blistering rally since late March, there’s considerable fear about the broader economy as well as where stocks are going … but Buffett isn’t showing any signs of his prescribed greediness.
To be fair, it’s not because fear has gotten the best of him. There’s a different reason why he hasn’t sunk any of his $137 billion cash pile into a new investment …
We have not done anything, because we don’t see anything that attractive to do.
Really? After the market drops 34%? Nothing?
Hold onto that a moment …
Our own Louis Navellier — who Forbes named the “King of Quants” — is another famous stock picker. He’s one of the early pioneers in using predictive algorithms to scour the markets for quantitatively-strong stocks poised to climb.
Unlike Buffett, Louis has been seeing wealth-generating opportunities in the market over the last two months.
In fact, he’s issued several new buy recommendations to his Breakthrough Stocks subscribers, and is already sitting on some double-digital gains.
This begs a question …
How is it that Warren Buffett isn’t seeing any attractive opportunities while Louis is?
After all, this contradiction would appear to suggest that one of these two famous investors is wrong …
***To help resolve this this apparent contradiction, let’s travel back to 1999
In an interview with Bloomberg Business Week that year, Buffett said the following:
If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that ‘size does not hurt investment performance’ is selling.
The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then.
It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.
Buffett was building on a comment he’d made just a few weeks earlier when speaking at the Berkshire Hathaway annual meeting of shareholders …
The universe I can’t play in has become more attractive than the universe I can play in.
I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.
In this second quote, Buffett was griping about the reality Berkshire Hathaway faced even back in 1999 — specifically, it had grown so big that Buffett could no longer hunt small-cap stocks (mosquitoes). Instead, he was limited to large-cap stocks (elephants).
To make sure we’re all on the same page, “cap” refers to “market capitalization.” It’s a measure of a stock’s size, representing the total market value of a company’s outstanding shares of stock. You calculate market cap by multiplying the total number of a company’s outstanding shares by the market price of one of those shares.
For Buffett, having to abandon small-caps was gripe-worthy because the reality is smaller, faster-growing companies are typically the ones most likely to offer explosive returns (enabling Buffett to guarantee 50% per year).
Today, Berkshire Hathaway is the sixth largest company in the S&P 500. In other words, Buffett’s size-problem has only gotten worse.
So, when he says he’s not seeing anything attractive, he’s referencing the large-cap space in which he’s forced to operate.
But do you know who’s still free to poach the high-flyers of the small-cap world, which is why he’s seeing opportunities?
That would be the King of Quants.
***While opportunities are out there, caution is needed
In Louis’ Breakthrough Stocks update last week, he noted how small-cap stocks roared back in April, with the Russell 2000 rallying 19% (the Russell 2000 is a small-cap stock index).
From Louis:
… this is a very positive development as large-cap stocks had largely outperformed small caps during the recent market turmoil. The small-cap surge also highlights that we’re in the midst of a broad-based market recovery.
Louis then turned to the current, mixed-results earnings season, as well as the earnings outlook for the rest of 2020, highlighting bleak expectations:
In this environment, it’s more important than ever to stay focused on fundamentally superior stocks. As we’ve discussed recently, I look for investors to grow more selective and for the stock market to narrow in the upcoming weeks and months. Stocks with superior fundamentals, positive analyst revisions, and solid forward-looking guidance will emerge as leaders.
***In a recent update, Louis called out a handful of stocks that had been benefiting from the “rising tide lifts all ships” rally we’ve been experienced since late March
Unlike truly strong stocks with the superior fundamentals that Louis’ system digs up, these weaker “me too” stocks have been clinging to the coattails of the recent market rally.
One example Louis provided was movie theater company AMC Entertainment Holdings, currently hobbled by the Coronavirus lockdowns.
From Louis, last Thursday:
As you may recall, Adam Aron, the CEO of AMC, said that the company isn’t seeing a “penny of revenue.” So, earnings and revenue are going to take big hit in the coming quarter.
Currently, analysts are expecting a first-quarter earnings loss of $1.44 per share, compared to a loss of $1.25 in the first quarter of 2019. Sales are estimated to decline 17.80% year-over-year to $981.5 million, versus sales of $1.19 billion a year ago.
In addition, the company took on $500 million in debt to help keep it afloat. And it doesn’t help that California might not allow AMC to reopen its theatres this year or that China won’t play Trolls World Tour, as it violates the Chinese ethics standard.
And yet, the stock surged 25.4% yesterday.
It would seem that the market has been reading Louis’ stuff. Here’s what AMC has done since:
***So, how can you separate the fundamentally strong stocks from the imposters?
As always, we recommend Louis’ free tool, the Portfolio Grader. It’s a fantastic way to get a fast snapshot of the fundamental quality of a specific stock. That’s because it’s rooted in Louis’ objective, numbers-based approach to the markets.
That means no hunches, no gut-feels … just cold, impartial numbers that identify strength, rooted in superior fundamentals and earnings power.
Though not a small-cap stock, take Microsoft to illustrate.
Below is its expanded Portfolio Grader report card. Note how Louis’ system quantifies Microsoft according to a series of numbers-based metrics, also providing a bottom-line rating.
It’s a telling snapshot of a prospective stock, all with just a few clicks of your mouse.
As I write Wednesday morning, I’m seeing a new alert from Louis about a high-flying tech stock many investors have poured money into — which he’s recommending his subscribers sell.
Why? Easy … the numbers are crumbling.
Investing according to numbers — not emotions — is a powerful way to reduce stress while improving returns. Try it for yourself and see.
This Friday, Louis is coming out with his latest issue of Breakthrough Stocks. I’m told the issue will include not one, but two new small-cap picks. The first develops high-precision sensing technology solutions all around the world. The second is on the cutting edge of medical technology products.
To subscribe to Breakthrough Stocks and learn more about these companies, click here.
As we wrap up, Buffett may not be buying, but that doesn’t mean opportunities aren’t out there. But it helps if you can still hunt mosquitos.
Have a good evening,
Jeff Remsburg
