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After the health emergency is behind us, one of the lessons investors will take away is the importance of ensuring that stocks that you own in a diversified portfolio are exposed to a variety of different sources of revenue.
The small caps Under the Radar includes in our Best Buys list are all companies that we believe will weather the COVID-19 storm. But we re-iterate that there will be continued volatility at least until the much talked about curve flattens in Europe and the US; and that you don’t chase stocks when they are racing upwards. Be patient and buy selectively in small parcels.
There has been a long period of time where diversification was an abstract concept (achieved simply by owning an ETF) led many investors to ignore the need to expose their portfolio to a range of different drivers of revenue.
Basically we’ve gone from being in an ETF driven momentum market, to going the other way because those same ETFs are not buying, they’re selling. It’s now a stock pickers market. Let’s look at the ramifications.
PE only means something only if you get a handle on E.
The average of all the companies’ PEs is the market. People talk about the market like it is a company. It’s not. You can invest in the market through index linked securities like ETFs, but this is very different from investing in companies. Investing in companies is ironically safer during times of increased volatility, because there are marked differences between those companies and their ability to handle the current conditions.
The key point is that there is increasing dispersion, which means that there is a widening divergence between the premiums or multiples investors are paying for the haves (consumer staples and the like) and the have nots (consumer discretionary stocks like travel agents).
Hence if you are buying a company you need to think about whether customers are still using its service or product. In this environment, more than any other time, revenues are the key, costs will be what they will be.