We’re seeing big discounts in the market … but they could get far bigger. Here’s the right perspective for investors today
One thing is certain: Crisis creates opportunity.
So says Eric Fry, our resident macro investor, and editor of Fry’s Investment Report.
Eric is a multi-decade finance expert with 40 different 1,000%+ winners under his belt, so when he’s talking opportunity, it’s usually wise to pay attention. And right now, Eric is seeing an increasing number of fantastic opportunities in the investment markets.
From his most recent issue of Investment Report:
While the broad stock market averages like the S&P 500 Index have fallen as much as 34% from their February record highs, many individual stocks have tumbled twice as much … or more.
These harrowing selloffs are presenting the best buying opportunities since 2009.
Now, let’s pause a second.
Eric isn’t calling for a rocket-ship, V-shaped recovery. In fact, in his issue, Eric goes on to say that stocks could easily fall another 10%, 20%, or even 30%.
So, that prompts a question …
How can he say we’re seeing the best buying opportunities since 2009 if we might see another 30% drop over coming weeks?
Today, we’ll address that. In doing so, we’ll also answer the main question burdening investors who want to take advantage of this market …
When do I buy?
We’ll then take this information from Eric, and return to Neil George and his list of companies seeing heavy insider buying, which is a big indicator of bullishness.
So, Eric will answer “when” to buy, and Neil will tell us “what.”
Let’s jump in.
***Today’s great buying opportunity might become “greater”
Let’s add a bit more context to Eric’s bullishness from above.
These harrowing selloffs are presenting the best buying opportunities since 2009.
But I’d like to place this large asterisk alongside the previous sentence:
*The current buying opportunity could easily become even better, before the stock market hits its ultimate bear market low.
In other words, the stock market could easily fall another 10%, 20%, or even 30% from where it is today. No investor should ignore that risk. Even so, I believe investors should begin to buy select stocks at their current levels … just not all at once.
It’s this last part — just not all at once — that resolves the tension between “today is a great buying opportunity!” and “we might have a 30% drop in front of us.”
As we’ve noted in several Digests recently, dividing your capital into, say, eight-to-ten chunks (the number is up to you) and investing those smaller chunks over regular, consistent intervals is the safer way to buy into the market.
Now, the count-argument to this approach is generally, “well, why not just wait and buy closer to the actual lows with a greater amount of your capital?”
In theory, great! Do it.
In reality, no one can do this — barring extreme luck. That’s because no one has a crystal ball revealing when the absolute low will come.
In Eric’s issue, he points this out, highlighting how even marquee investors including Seth Klarman and Warren Buffett bought in early during past crises … and had to sit through some brutal losses.
Back to Eric:
Inconveniently, no one knows for certain how low a stock could plunge before it snaps back and begins a major new upside move.
Trying to guess that precise moment is an impossible feat, which is why very few successful investors devote much time or energy trying to do that. Instead, they make their “best guess” and pull the trigger — knowing that “good enough” can produce spectacular results.
***The numbers show why “early” is still good enough
In Eric’s issue, he looked at past market crises: Thai stocks after the Asian currency crisis of 1997 … Argentine stocks after that country’s currency crisis in 2002 … and U.S. stocks after the 2008 crisis.
But rather than look at returns from the precise market bottom, Eric evaluated what an investor could have made by investing “too early” — in this case, three months before the precise bottom.
From Eric:
In each of these three instances, investors who made their buys “too early” would have suffered some bitter times on the way to their sweet rewards.
The chart below shows this. It reflects the losses an investor would have had to sit through by investing too early (in blue). But it also shows subsequent 5-year and 10-year returns from this “too early” purchase (in orange and lime, respectively).
In all three cases, early investors had to sit through big losses before going to on enjoy huge returns.
Back to Eric:
The Russian default and currency crisis of 1998 provides one of the most dramatic examples of this phenomenon.
An investor who purchased an index of Russian stocks in the three months before that stock market bottomed on October 5, 1998, would have suffered a whopping 81% loss.
But investors who hung on for the rest of the ride could have doubled their money within four years, tripled their money within five years, and captured a 1,000% gain within eight years.
***What you gain by losing
Though it’s a simple point, it can be helpful to visualize what’s actually happening when you buy too early.
The situation below is what terrifies many investors …
Meanwhile, the situation below is what investors dream about …
The reality?
These two “terrible” and “brilliant” purchases were made at the exact same market-level of the S&P when it crashed back in December 2018. It’s the same purchase price … just on different sides of the gully.
The first purchase had the ultimate low in front of it, while the second had the low behind it — but the amount of dollars an investor would have made by purchasing at these two times was the exact same.
***The danger you sidestep by buying-in too early
We tend to focus on the pain of buying too early, only to watch losses pile up in our accounts. And that is a danger — especially to an emotional investor who might be tempted to sell when the pain keeps coming.
But waiting to buy until after the low also carries danger — specially, what if you never buy-in?
You see, new questions pop up after the markets have been rallying … Is this a bull trap? Was that really the low or should I keep waiting? Have prices already climbed too far, too fast? Am I chasing this rally?
Investors often start second-guessing themselves. Many do nothing … and end up not buying into the rally at all.
The investor who got in “too early” doesn’t worry about these questions. He’s just riding the recovery higher at this point.
I’ll give Eric the last word on this idea:
Stocks could certainly fall even lower than their current levels.
But that’s why investors should focus on the potential gains an investment today could produce over the next year or two — not over the next month or two.
You can click here to learn more about the specific opportunities Eric is seeing today.
***Applying Eric’s thoughts on “when to buy” to Neil George’s list of companies with heavy insider buying
So, we now have a better idea of “how” to buy. But how about “what” to buy?
For one option, let’s return to Neil George, editor of Profitable Investing and his research into companies seeing heavy insider buying today.
Let’s make sure we’re all on the same page …
While there are countless reasons why corporate insiders might sell company stock, there’s only one reason they buy them — they think the price is going up.
And as we’ve noted in past Digests, corporate executives and directors have the best information on their companies’ prospects and financial conditions. Insiders typically see boom times and bust times way ahead of outsiders. So, watching what they do can be a great indicator of company-specific bullishness or bearishness.
So, the question is which stocks are seeing heavy insider buying today?
In the last month, Neil has been doing the research for us. He’s been diving into corporate filings, looking for notable cases of heavy insider buying.
We’ve already published two batches of his research. Today, let’s add a few more to the list. So, at this point, I’m going to hand it over to Neil.
***Four new companies with heavy insider buying
NuStar Energy (NS) is another transporter and storage company for crude oil and refined products. Storage of oil and refined products is now one of the more highly in demand markets as traders and consumers are stocking it away anywhere they can. It has seen 14 insider block buy trades amounting to 438 thousand shares.
ONEOK (OKE) is a long-standing leader in the natural gas business in the U.S. It has reported 9 insiders buy block trades in the stock amounting to 159 thousand shares.
XCEL Energy (XEL) is the major U.S. utility with conventional and a rising amount of ESG-friendly (environmental, social & corporate governance) green energy production. Frank Prager who oversees the company’s strategy and planning just went through his personal broker and just bought 7,150 shares bringing up his ownership to over 43 thousand shares.
Covanta Holdings (CVA) is the leader in renewable green energy from waste (EFW) market with facilities in key metropolitan markets in the U.S. And it has the backing with the massive Australian-based infrastructure company — Macquarie Group which is bringing new facilities in the UK and Ireland. It has reported 17 insiders buying block trades amounting to 409 thousand shares including heavy buys from the CFO, Brad Helgeson who now holds 141,795 shares.
***Jeff here again …
As we’ve pointed out before, insider-buys are no guarantee that a company’s profits and share price will immediately race higher. But such purchases are good indicators that those who know the company are confident enough to put their own money on the line.
And remember the takeaway from Eric’s research — you don’t have to nail your timing perfectly. Buying-in consistently and regularly in smaller chunks is how many pros make huge, long-term returns — even if the purchase is made well before the market actually bottoms.
Have a good evening,
Jeff Remsburg
