There are so many esoteric good businesses out there, but very few attractive investment opportunities for new money right now.
In equities, I search for consistency from a company—consistency of corporate operating performance, diligent management in good times and bad, and a good track record of return on investment on the stock market. A stock’s past performance isn’t directly indicative of its future performance, but I find it goes a long way to improving your odds.
One company that provided the kind of consistency I’m referring to, and which I reviewed at the beginning of the year and again in October, is A. O. Smith Corporation (AOS). This is a Milwaukee-based water heater company. This stock has proven to be an exceptional moneymaker as of late. (See “How This Solid Old Economy Company Keeps Beating Tech Stocks.”)
But while the company’s business is growing, it’s not growing exceptionally; it’s not some highflying new technology company or some 3D printer manufacturer. A. O. Smith simply manufactures and sells water heaters, and while I really like this business, I don’t think it’s worth 23-times its forward earnings.
The Fed’s unprecedented monetary stimulus has boosted the share price performance of the most mature enterprises to the point that they’ve significantly outperformed their historical track records. This company is one of those enterprises. A. O. Smith’s 20-year long-term stock chart is featured below:
Chart courtesy of www.StockCharts.com
While shareholder return in a company like A. O. Smith has been great over the last few years, there is seemingly little value in accumulating the stock now. Price momentum can always surprise with its duration, but there’s just not that much to buy in a market that’s at its all-time high.
This is why a meaningful and prolonged stock market correction would be so useful for equity investors who can’t seem to find any attractively priced businesses in which to invest.
Over time, most of the best publicly traded businesses have been consistently hitting new record-highs on the stock market, peppered with periods of nonperformance.
As share prices increase, I view investment risk as going up commensurately. While the opportunity cost of not being in equities has proven to be significant, a little “GARP” (or growth at a reasonable price) is a useful reminder.
So for those investors considering new positions, there’s not a lot of action to take in this stock market, considering the amount of investment risk associated with elevated valuations and record-high share prices.
With the exceptional performance this year of the S&P 500, the NASDAQ Composite, the Russell 2000, and the Dow Jones Industrial Average, this isn’t the time to be a buyer.
In terms of portfolio strategy, I’m reticent about buying this market and a company with a good track record like A. O. Smith. Given current information, the next major price correction in stocks will likely be an attractive buying opportunity, so long as deflation isn’t in the cards.
I like an old economy company like A. O. Smith, but I wouldn’t be a buyer of the stock currently. If the position corrected to below $40.00 a share, that would be another story.
So many mature enterprises like A. O. Smith have experienced an expansion in valuation and record-high share prices. The water heater business is a good one long-term, but it’s only worth considering when it’s a real value.