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Two Winning Stocks for the New Economy - 40265 views
Let's take a step back and respect history for a second.
AIG (AIG), a $200 billion insurance behemoth, was started right after World War I by scrappy and persistent Cornelius Vander Starr as he went from boat to boat selling insurance at the ports of Shanghai with $1,000 in his pocket. Lehman Brothers was started 158 years ago by three cotton sellers from Montgomery, Ala., who, like so many others after them, decided to get into the trading game and began trading their cotton.
These were great companies, started by creative entrepreneurs who looked for every opportunity to make a dollar and resisted the temptation to quit when things were difficult. It's a shame that because of FASB 157, combined with a run on the banks, these companies are now out of business. But that was a risk the management of the companies took, and they lost their dangerous bet. Time to move on.
First off, how can we make money consistently on the long side when volatility is this crazy. Let me just say, you can't make money going short in a bear market. It seems like you should be able to make money, but let's not forget the example of 2001: bear market, recession, terrorist attack, Enron -- and still the CSFB short-selling index (made up of the returns of hedge funds dedicated to short selling) was actually down 3% on the year. No good.
But you don't need complicated mathematical formulas and rocket science running on supercomputers to figure out the right models. Here's one simple trick, which I wrote about here three years ago: When a stock goes down for three days in a row, buy at the end of the third day. If you own a stock and it goes up for two days in a row, sell at the end of that second day.
No stop loss. No profit target. No time target. It's a long-only system. Using 1% of equity per stock and playing this system on Nasdaq 100 stocks (including stocks that have been deleted) since 1999, you would've had no down years. You would've been up an average of 31% per year (again, only using 1% of your portfolio size per trade), and in 2008 so far you would be up 15%, even including the volatility of last week. In 2002, the system was up 40%.
All last week I kept trying to understand what was going on with AIG, Lehman, Goldman (GS) and the other banks. How could they collapse so fast? I felt none of the media was properly explaining what was going on. But does it matter? It's done. It's over. Let's move on. It's the "New Economy" now, an economy in which the major banks are in consolidation and knowing how to game them day by day is not only impossible but possibly suicidal.
So in this New Economy, who are the winners? First off, pawn shops are doing great. And when the economy weakens, more people need to borrow money from the pawn shops. No subprime here. Its sub-sub-subprime -- with the main difference that people leave their collateral at the store when they borrow money, often at a 30% loan to value. Meanwhile, the collateral that they've left at the stores, usually gold, is going up every day in this environment. Cash America (CSH) is my favorite play in the space. The company trades at five times cash flows, and one of its top executives just bought $2 million worth of stock out of his own pocket. He's a believer. It also recently raised guidance on the quarter.
Next up is Asset Acceptance (AACC). With people defaulting on their credit cards and banks trying to get this bad credit card debt off of their books, Asset Acceptance comes in and buys the bad credit card debt for 3 cents on the dollar and then proceeds to collect on that debt. It trades for just 3 times the cash coming in this year. The debt it is buying from banks is cheaper than ever. It has recurring revenues based on automatic payment plans, so growth is predictable. Ironically, increased foreclosures actually help a company like this. When people give up their house to foreclosure, they stop paying their expensive mortgages. What do they do instead? They pay off their bad credit card debt so they can move on with their lives.
This is a hard time. It's possible to say that this time things are different. But we've been through 9/11, the 1987 crash, wars, scandals, depressions, stagflation -- and the markets always come back to make new highs. Always. This time the world financial system is supposedly going to collapse, and capitalism is being called into question. But it's not going to collapse, and there are more C.V. Starrs out there to build great companies. It's time to keep calm and invest in them. And while you are waiting for those entrepreneurs, keep it simple, and buy stocks that fall down too sharply. On average, they bounce back in good times and bad.
So when people are looking for "value" plays like General Electric (GE), Procter & Gamble (PG) or Wal-Mart (WMT), you should point them towards these plays. They're super cheap, and they do well in any environment.
By James Altucher
Posted on Sept. 24, 2008