Fundamentals Vs. Fear

Something that makes investing so difficult is when the fundamentals are so good and the stocks don’t go up.  You’ve often heard in the short run, the market’s a popularity contest, but in the long run it’s profits by the pound. 

Why does a company like Potash (POT) report earnings last week that were up 220% and sales were up over 100% and yet the stock goes down?  This is what makes investing frustrating in the short run but it also gives us huge opportunities.

Let’s take Coca-Cola, Intel, Microsoft, or General Electric for example.  In the 1990s, these stocks kept going up.  Sure, their profits were good.  But, the stocks got extremely expensive based on several valuation metrics.  So, many people missed the huge run in equities in the 1990s because stocks were “too expensive”.  The ones that focused just on fundamentals (the value guys) missed out on one of the greatest bull markets in history. 

At some point (March 10, 2000 to be exact), those value guys got what they wanted.  The market peaked because stocks were too expensive.  But, the market had gone up from 1995-2000 about 200%.  So, the point is stocks weren’t moving like the fundamentals then.  They were moving based on greed.  And that greed went on much longer than most thought it would. 

We fast forward to today.  From 2000-2008, the S&P 500 has gone basically nowhere.  Flat.  But, you see the profits of Coca-Cola, Intel, Microsoft, and General Electric continue to go up.  Some have tripled from that time.  Sales have gone way up.  They’re doing more business in emerging markets, etc.  But, the stocks haven’t gone up.  Why?  Because they were overpriced in 2000.  It’s taken 8 years and counting to get the stocks to a more reasonable level while the profits catch up.

If you could draw 2 lines, where the company should be and where it is, you’d see over time these 2 lines don’t correlate very well.  This is because stock prices move up and down because stock prices are controlled by moody investors.  And therein lies the opportunity and frustration.  It’s fundamentals vs. fear.

Right now in the global growth area, you’re seeing fear beating out fundamentals.  The fundamentals for the sectors like coal, steel, energy, steel, agribusiness continue to improve.  Yet, the stocks have fallen 15-20% since July 1st.  Long-term opportunity and short-term frustration.

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