For the last half decade plus, U.S. stocks have been just about the only game in town. While the DOW and other U.S. major indices rest near all-time highs, European stocks, for example, as represented by VGK, have seen little net upward movement since 2006 (with plenty of ups and downs along the way). The situation with U.S. stocks relative to the rest of the world is akin to that of growth stocks in the late 1990s vis-a-vis their ugly duckling brethren value stocks within our own borders. “Why bother owning value stocks?” was the common refrain, reflecting the typical rear view mirror investment philosophy rather than fundamentals (valuations, dividend levels, etc.) and most important, future prospects.
Today European stocks trade for approximately 12X earnings vs. around 16X for the U.S., and sport a dividend yield of nearly double that the S&P 500 (around 3.8% for VGK versus about 1.9% for SPY). So while it is true that growth stocks were all the rage for nearly the entire decade of the 1990s, value had its day – and many of them at that – once the tech bubble burst in early 2000. For much of the aughts, value dividend paying stocks lead the way while former growth high flyers floundered or in many case crashed and burned.
I am not suggesting that U.S. stocks are as over-valued today as many segments were in 1999, but as you seek to allocate capital in an otherwise generally expensive U.S. stock market environment, considering some allocation to markets outside our borders could be a good way to achieve long-term returns in excess of the 4% - 5% expected by the late great Jack Bogle and other long-term oriented investors for US stocks. While no one can accurately and consistently predict stock market returns, especially in the near term, for those with a long term time horizon and openness to investing beyond our borders, having some international exposure could prove beneficial in the years to come – regardless of what the last decade has looked like.
This past week, KHC, the maker of such iconic brands as Oscar Mayer meats (‘my bologna has a first name…’), lightened a few investors’ wallets with the announcements of an earnings miss, massive write offs, a dividend cut, and other negative headlines. Prior to the news, the stock was trading near $50, having drifted downward over the preceding several years, and had universal support from much of Wall Street (read: positive, buy oriented analyst ratings on the stock).
The morning of the quadruple whammy bad news, the stock dropped (dripped?) nearly 30%. And then all the Wall Street analysts who theretofore were positive on the stock started cutting their price targets. I won’t pick on any one of them, but analyst after analyst downgraded their recommendation on KHC from ‘Overweight’ to ‘Equal Weight’ (whatever that means) and slashed their price targets from the 50s or even 60s to….wait for it…a price right around where the stock was trading after it got slaughtered (the mid 30s). How prescient (if prescient meant stating obvious information after the fact). One bank even changed their rating to negative and lowered their price target to $47, a whopping 38% higher than the stock price sat when they had their change of heart. Imagine this conversation: “…what are your views on the overall market?” “Quite negative, actually.” “Oh, so you think it will be dropping?” “No, I see the DOW rallying 9,000 – 10,000 points from here and closing somewhere just south of 40,000.” Yes, you too would be scratching your head in confusion over the conflicting messages.
Wall Street analysts can play an important role in your investment analysis; when an otherwise good company drops on negative news and all the analysts rush to downgrade their price targets after the fact, wait a few days, let the stock price wash out, do your own fundamental research, and then use the downgrades as a reliable contrarian indicator. Then, after the stock rebounds in a year or 2 (a life sentence in Wall Street time), as the same analysts who downgraded the stock at price X and who are now upgrading to ‘Buy’ or ‘Overweight’ at price 2X, consider lightening the load a bit (AKA taking profits).