CWS Market Review – January 8, 2021

“In a roaring bull market, knowledge is superfluous and experience is a handicap.”
– Benjamin Graham

This week’s financial news was overshadowed by the disturbing events in Washington, D.C. It seems somewhat inappropriate to focus on financial markets at this moment, but that’s our job with this newsletter, and do it we shall.

I live in Washington, not too far from Capitol Hill. In fact, I’m writing this newsletter to you under orders of a 6 p.m. curfew. That’s a sentence I’d never thought I’d write. At this moment, I can see National Guard units from my window.

Nevertheless, the stock market has had a positive week. On Thursday, the S&P 500 broke above 3,800 to reach a new all-time high. This is another reminder of an old lesson—financial markets aren’t easily phased by scary headlines.

I’m pleased to say that our Buy List is off to a good start in 2021, and we’re already beating the overall market. Speaking of the Buy List, in this week’s issue, I want to go into more depth about the Buy List changes I made this year. But first, I want to look at a question a lot of people have been asking—are we in a bubble?

Are We In A Bubble?

Since the market low last March, the stock market has raced ahead nearly without a break. In fact, November and December were some of the best final two months for the market on record. All of this happened during a pandemic and a contentious election.

That’s led some people to claim that we’re in the midst of a gigantic bubble. Bear in mind that there are people who always claim that we’re in a bubble. Of course, bubbles do happen, but they’re rare. Bear markets also happen, but I’m distinguishing a normal market downturn from a true bubble.

First, let’s get an important fact out of the way: Just because prices go up, we don’t have proof of a bubble. This time, we’re not seeing rallies only in stocks but in other areas as well. Tesla and Bitcoin are probably the best examples. This week, Bitcoin broke above $40,000. That’s nearly a tenfold increase from its low in March. That’s an astounding rally.

In the last month, the price of Bitcoin has doubled. The total value of all cryptocurrencies is now more than $1 trillion. This week, JP Morgan said that Bitcoin could get to $146,000 in the long term.

Over the last 18 months, shares of Tesla are up close to 20-fold. Elon Musk recently passed Jeff Bezos to become the richest man in the world. During 2020, Musk saw his net worth increase by $140 billion. That works out to $265,000 every minute.

I’ve heard the claim that these aren’t separate rallies. Rather, all these rallies are connected. The world, we’re told, is drowning in fiat currency. So the argument is that this is nothing more than the inevitable outcome of unprecedented monetary stimulus all around the world.

Eh…maybe.

While it’s true that governments have printed money like never before, I tend to be a skeptic regarding all the bubble predictions. I’ve shied away from both Bitcoin and Tesla—not because I have anything against them, but rather because both appear to be difficult investments. I can’t make a reliable forecast of Musk’s future business. With Tesla, you’re paying a tremendous amount for a company that’s still quite small compared with other car companies.

With Bitcoin, you have a tremendously volatile asset. Not that long ago, it fell from $19,000 to $3,000. True, it made that money back, but this price history suggests that such plunges are part of Bitcoin’s nature. Some people might be fine with that, but others are not.

Bitcoin is also highly concentrated. Very highly. According to researchers, 95% of Bitcoins are owned by 2% of accounts. That means that it can be susceptible to manipulative trading. While Bitcoin’s rally is certainly impressive, I wonder if a currency that’s so volatile will become more mainstream. There’s some comfort in knowing that your daily run to the local Starbucks won’t change that much day to day.

The other part of all this bubble talk is timing. Bubbles can go on longer than you think. John Maynard Keynes famously said, “markets can remain irrational longer than you can remain solvent.” That’s certainly true. I remember the dot-com craze of 20 years ago. Lots of people knew it was a bubble. The problem was that no one knew when it would burst. The same for the housing bubble.

I think the best strategy is to steer clear of such investments. Perhaps a modest allocation of resources, if you’re truly game. I always remember these words from Peter Lynch: “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

Now let’s take a closer look at this year’s Buy List changes.

This Year’s Five Buy List Sells

As happens every year, this year five stocks were added to the Buy List and five stocks were deleted. That keeps the turnover at 20%. It also means that the average holding period for each new stock is five years.

I’m often asked if that’s a handicap. I think it’s the opposite because it forces me think hard about whether I’ll be comfortable owning each new stock for five years. Doing that makes you focus on the long term.

The five sells were Becton, Dickinson (BDX), Eagle Bancorp (EGBN), Globe Life (GL), Hormel Foods (HRL) and RPM International (RPM).

The decision to sell a stock is not easy. The most common reason is that it’s no longer the company you bought. With Becton, Dickson, that’s literally true, because we originally bought CR Bard. We got shares of BDX after they bought out CR Bard.

Such situations are always a difficult call, because the nature of the investment changes. We gave BDX a good chance to prove itself, but the earnings this year weren’t as good as I expected.

With Eagle, the problem was obvious. The bank had racked up big legal bills due to possible bad deeds from its previous management. I thought I saw an opportunity for a bargain. The problems, however, were never cleared up, and I underestimated how long the cloud would hang over the bank.

The decision to sell Globe Life was about earnings. In February, the company reported a miss for its Q4. Then its Q1 earnings were down from the previous year. GL’s outlook for 2021 wasn’t terribly impressive. I thought this was a good time to let the stock go.

I love Hormel Foods, but the Spam people made my decision easy this year. Hormel simply didn’t perform well for us. The most recent earnings miss was the final nail in the coffin.

RPM International was a difficult decision. Fundamentally, it’s a solid company. However, I think the shares are rather pricey. I wouldn’t mind adding RPM back sometime. The company has a long dividend streak.

Profile of Miller Industries

The five new stocks are Abbott Laboratories (ABT), HEICO (HEI), Miller Industries (MLR), Thermo Fisher Scientific (TMO) and Zoetis (ZTS).

Over the next few issues, I want to highlight the new buys and why I like them. This week, I’ll start with Miller Industries. To refer to Peter Lynch again, in his book One Up on Wall Street, Lynch gave some advice about what kinds of companies to look for. He said investors should look for companies that do something dull. Why? Because those stories often get overlooked. He also said to look for companies that do something disagreeable. After all, someone needs to do the dirty jobs.

That reminds me of Miller Industries (MLR) of Ooltewah, Tennessee. My apologies to the good people of Ooltewah, but I don’t think it’s normally thought of as a hot spot for promising companies. Well, perhaps it should be.

Miller Industries makes and sells towing and recovery equipment. The company makes wreckers that are used to move disabled vehicles. They also make those car carriers that you often see on the road. If a car or truck needs to be hauled out of something and then hauled away somewhere, odds are, Miller’s got a vehicle that can do it.

The company was started by Bill Miller in 1990. His idea was to find well-known brand names in a highly segmented industry. Miller then planned to grow the business by buying up smaller names.

Miller standardized the business so that different parts could fit in any vehicle. Miller Industries now owns several different brands, including Century, Vulcan, Chevron and Holmes. Miller quickly grew to have 40% market share. In fact, it soon got the attention of the anti-trust folks.

By 1994, Miller had its initial public offering. The company sold 10.7 million shares to the public, which brought in $30 million. The stock took off and vaulted eight-fold in less than three years. As you can see in the chart below, the stock price got a reckoning about 20 years ago. After that, it’s been much more of a steady grower. The current market cap is $450 million.

The company currently has three manufacturing facilities in the United States, plus one in England and another in France. I like how they keep innovating. A few years ago, Miller introduced the world’s first rolling rotator with a 100-ton recovery capacity.

This is an interesting time to look at MLR because the stock got slammed during the initial lockdowns. From top to bottom, the shares lost one-third of their value. However, the stock hasn’t bounced that much off its low. It’s up, but not nearly as much as the rest of the market. That got my attention.

Like many other businesses, Miller was impacted by the lockdowns. In May, Miller said that sales for Q1 fell by 10.7% to $176.1 million and net income fell from 76 cents per share down to 48 cents per share.

Jeffrey I. Badgley, the co-CEO, said they had to shut down some of their manufacturing facilities. However, Miller has adjusted operations, and the company has been classified as an essential business. Miller should be able to weather the storm.

For Q3, Miller saw its sales drop by 13.9%. EPS was 57 cents. That was down 19% versus the same quarter the year before. Miller also paid off all its long-term debt. The next earnings report should be out in early February.

Miller Industries is a good example of a company with a strong “moat.” There are competitors, but it’s the dominant name in the business. It would be very difficult for a competitor to come in and knock Miller off its perch.

I like that no Wall Street analysts follow Miller. That’s pretty remarkable considering the company’s long-term success. The company currently pays out a quarterly dividend of 18 cents per share. That works out to a dividend yield of 1.8%. Miller Industries is a buy up to $42 per share.

That’s all for now. The December jobs report is due out later today. There are a few key economic reports scheduled for next week. The CPI report comes out on Wednesday. We get another jobless-claims report on Thursday. The retail-sales and industrial-production numbers come out on Friday. Soon after that, the Q4 earnings seasons starts up. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

P.S. Josh Brown recently hosted me on his podcast. I had a great time. Check it out.

Posted by on January 8th, 2021 at 7:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.