CWS Market Review – April 19, 2021

“I want to take you higher.” – Sly Stone

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The S&P 500 was down modestly today, but the stock market has been in a buoyant mood lately. Through Friday, the index made eight all-time highs in eleven trading sessions. So far this year, the S&P 500 has closed at a new all-time high 23 times. That’s nearly one out of every three trading days.

How Does the Market Act At An All-Time High?

This naturally raises an important question: How has the market performed historically when it’s been at an all-time high?

So I crunched the numbers and counterintuitively, the answer is that the market’s done pretty well. I say counterintuitively because for many investors, the natural response is to get nervous and sell when things are going well. But the smart move, according to the data, is to sit tight and enjoy the rally.

Here’s what I did. First, I took all the daily closes on the S&P 500 going back to 1960 and sorted out all the days when the index closed at an all-time high. There were over 1,000 such days, which is roughly 7% of the time.

Next, I looked at the performance of just those days. On days following an all-time high, the S&P 500 has gained an annualized 14.20%. That’s quite good. On days not following an all-time high, the stock market has risen at an annualized rate of just 6.71%.

In other words, the market’s done better than twice as well when it’s been at an all-time high.

Not only that, but the daily volatility has been much lower as well. Coming off all-time highs, the daily volatility is about half that of the other days. In fact, when the market is at an all-time high, it’s fairly rare to see it jump by more than 1% the following day (although it happened earlier this month).

I found only three times when the market rallied more than 2% coming off an all-time high. The biggest one came on January 5, 1999 when the S&P 500 gained 2.21% after making a new high. That sounds impressive but on all the days since 1960, that day only ranks as the 283rd best.

What does all this mean? The important lesson for us is that the stock market is a momentum-friendly data series. Bull markets tend to build on themselves. Things get better which leads people to think things will get better. The downside is, of course, the turning points because bear markets also build on themselves. Better begets better. Worse begets worse.

This is why fairly simple metrics like the 50-day moving average tend to have a good track record. It couldn’t be simpler. The 50-DMA is just the average price over the last 50 days. Yet most of the best and worst days tend to come when the index is below its 50-DMA. It’s an example of a dumb rule that works because it understands the nature of the market.

What’s interesting is that the big market crashes usually haven’t come at the peak. Instead, they’ve come on growing downward slides from the peak.

Texas Pacific Land Trust

I probably get the most feedback when I write about some obscure company that no one’s heard of that’s creamed the market for years. People often ask me how I know about these stocks and I don’t have a good answer except that I collect them over many years.

Today I want to tell you about a fascinating company called the Texas Pacific Land Trust (TPL). TPL is all about land. Lots and lots of land down in Texas. The Texas Pacific Land Trust currently owns over 900,000 acres in the Lone Star State. As Mark Twain said, “Buy land. They’re not making it anymore.”

TPL has a colorful history. It was born over 130 years ago when the Texas and Pacific Railway went bust. The aim of the T&P was to build a southern transcontinental train route.

You may remember the transcontinental railroad from history class. You know – U.S. Grant, golden spike, Promontory Point. Ring a bell? Well, that ran across the country, but it was mostly through the North. If you were in the South, you had to go north and then go east or west. The aim of the Texas Pacific was to change all that. The plan was to connect Austin to San Diego.

They borrowed tons of money and bought tons of land. Despite the name, the T&P never made it to California. Like many dreamers before them, the railway went bust. Now they had tons of debt. There are vestiges of the old Texas and Pacific Railway. For example, the impressive Texas and Pacific Station still stands in Fort Worth.

Instead of selling off the land, a trust was formed with 3.5 million acres of land. People who held the railway’s worthless bonds got shares of the new land trust. The trust made money, and everyone was happy. Eventually, those shares started trading on the NYSE in 1927. (On a technical point, Texas Pacific Land Trust is not a REIT. It’s a land trust.)

Over the years, TPL has sold off 75% of its holdings. Despite that, it’s still one of the largest private landowners in Texas. The trust gets its income from land sales, oil and gas royalties and grazing fees. They really don’t try to sell their land, and on rare occasions, they’ll actually buy some land. It’s rare, but it happens.

TPL has mostly evaded the looming gaze of Wall Street. Not many people know their story. What I really like that is that much of what TPL owns is in the booming Permian Basin.

But here’s what I really like about TPL. It’s the buyback king. The trust uses any excess cash to buy back its own shares. This is particularly important because as a landowner, the trust doesn’t require large capital investments. They’re just the landlord. Until a few years ago, the entire company employed just ten people. Over the last 40 years, TPL has reduced its share count by two-thirds.

Check out this 30-year chart:

(Pro tip: It’s usually a good sign when a stock has done so well that the log scale numbers on the right turn into a blur.)

Since TPL owns the land outright, they’re not as impacted by the boom-and-bust cycle that characterizes so many companies connected to oil and gas. You’ll notice how often investment bubbles are truly credit bubbles masquerading as something else. That’s not such a problem for TPL since it’s raison d’etre is not being in debt.

TPL was recently the subject of a nasty proxy fight. There were lawsuits and counter suits. Both sides accused the other of fraud. I won’t go into the details except to say that that the legal mess seems to have died down and the two sides have reached an agreement. One side effect is that TPL has converted into a regular corporation. Officially, it’s now the Texas Pacific Land Corporation.

Twenty-five years ago, you could have picked up a share of TPL for about $5. Today that share is worth more than $1,500, and that doesn’t include the dividends you would have collected on the way. In December, TPL paid out a special dividend of $10 per share.

Even though TPL has an amazing track record (+70,000% since 1992) and a market cap of $12 billion, I don’t want you think that it’s completely ignored by Wall Street. Not at all!

Two analysts cover it.

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– Eddy

Posted by on April 19th, 2021 at 6:26 pm


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.