“Maybe history does not repeat, but it certainly rhymes!”
-Mark Twain
The market’s present status quo is one of omnipresent exuberance, characterized by an overall bullish investing mood and supported by the Dow, DAX and other indices continuously hitting record highs. Ever since the trough of March 2009, the only direction for markets has been up and counting. With the VIX around 11, i.e. the lowest level since December 2006, investors are being lulled into safety and risk taking.
Neither earlier nor the most recent economic data confirm the much anticipated and hoped for recovery, but this does not seem to spoil investors’ appetite in the least nor hamper the continued upsurge of bourses worldwide. Even the worrying fact that margin lending has now reached an alarming record high of $384 billion compared to prior highs of $381 billion back in July 2007, and similar levels in early 2000 before ending the dot.com and housing bubbles with a loud bang and sizable declines, does not seem to scare anybody in the context of the ongoing revelry.
How can one stay sober in a time of increased expectations when the best is yet to come?
The plot thickens
Most recently, various experts have started outdoing one another in predicting new highs for the markets. One of the first augurs to point to heaven was Asoka Woehrmann, Co-CIO of Deutsche Bank’s asset & wealth management, predicting the DAX would reach 9,200 by year’s end. Adding to that he proclaimed that, “while I had been skeptical all the time before, this time I know it’s for real!” Sounds a bit like, “this time it’s different,” does it not?! Then, revered professor of finance, Jeremy Siegel, sees a continuation of the uptrend and the Dow hitting 17,000 for 2013. And, to top it all off — surprise, surprise — renowned and at times prescient, Nouriel Roubini aka Dr. Doom, has miraculously turned into a Dr. Boom forecasting the markets to continue their ascent. Not only has the professor cum turncoat become a market bull, now he even confirms a time corridor of precisely two years of perfect bliss before a serious downturn ensues.
This actually means that you will be able to put your money in stocks, your mind at ease and enjoy watching them increase your net worth. It really does not get better than that! Somehow this is reminiscent of many a Chinese retail investor’s stern belief during the 2007 bull market that the Chinese stock market cannot and will not go down, simply because “the government and the party said so.”
There you have it: a banker (an expert at investing OPM, i.e. Other People’s Money, not his own) and two brilliant economists (theoretically and conceptually that is), reassuring the gullible investing public that the very best is yet to come.
Have you ever been wondering why these experts could never be bothered to monetize their sagacity and wisdom about the markets in practice? Why is it that, instead of entertaining the media and followers, they do not simply start their own hedge funds to rake in gazillions in the process? Whenever you get overall consensus is when it gets dangerous, really dangerous. New record highs continuously perpetuating emotional hype & euphoria force rational analysis and sober decision making to take a back seat. Before waiting for the tide to recede and see who is naked, let’s be preemptive by looking at:
Select stocks with serious bubble symptoms
Whirlpool Corporation (NYSE:WHR) is a leading home appliance & tool company that has won the title of most admired company in the home furnishing and equipment category as per FORTUNE’s 2013 ranking. It just got an upgrade to “Hold” from “Sell” by S&P Capital IQ. Just how you can “Hold” something after you have “Sold“ it, well, is again another story…
Saia Inc (NASDAQ:SAIA) is a company that provides trucking and logistic services across the United States. It has just declared a 3-for-2 stock split in order to make its stock more affordable to the investing public.
Snap-on Incorporated (NYSE:SNA) is an appliance & tool company, a manufacturer and marketer of diagnostic equipment, repair information and solution systems for professional users.
What do these companies share in common, apart from being cyclicals that move in tandem with an expanding and contracting economy?
They all are trading around all-time, multi decades’ historical highs, outperforming the S&P by a super large margin during the last 12 months.
WHR + 108.3%
SAIA + 143.0%
SNA + 56.4%
S&P + 26.9%
While this is not too surprising given the general, broad upsurge of the markets, it is very interesting to search for the exact reasons behind these mighty outperformances.
Top line development
| Company | REV2008 | REV2012 | VARabs | VARrel | REVQ1-12 | REVQ1-13 | VARabs | VARrel |
| Whirpool | 18,907 | 18,143 | -1,764 | – 4.1% | 4,348 | 4,248 | -100 | – 2.3% |
| Saia | 1,030 | 1,099 | + 69 | + 6.6% | 269 | 274 | + 3 | +1.8% |
| Snap | 2,853 | 2,938 | + 85 | + 2.9% | 735 | 742 | + 7 | +0.9% |
Unit: $million
Share appreciation
| Company | PRICE2008 | PRICE2012 | VARabs | VARrel | PRICEQ1-12 | PRICEQ1-13 | VARabs | VARrel |
| Whirpool | $ 81.6 | $101.8 | +$20.2 | + 24.7% | $76.8 | $118.0 | +$41.2 | + 54.0% |
| Saia | $ 12.0 | $ 23.0 | +$11.0 | + 92.0% | $17.1 | $ 34.8 | +$17.7 | +104.0% |
| Snap | $ 39.4 | $ 79.9 | +$39.6 | +100.5% | $61.0 | $ 82.7 | +$21.7 | + 35.5% |
The YTD 05/13 prices attained even higher record highs at $128, $47.8 and $91 respectively.
Fundamental growth and share prices grossly out of sync
As is very obvious, there is a huge discrepancy between real top line growth rates and share price appreciation. During the past, long four and a half years, these companies produced negative or dismal growth at best. The latest quarterly numbers show even lower growth rates. Let me rub it in: These companies have basically grown by zero, zilch, nada, null, ноль, 零! Yet, at the same time, their shares increased in value by double, even triple digits. During the last business year this huge gap continued to widen even further!
It’s the outlook, stupid!
How can this yawning gap be explained in a way that makes sense? Has the cause and effect relationship been inversed? Desperate and unable to identify meaningful fundamental drivers, analysts resort to chasing fata morganas trying to create plausible causes out of thin air:
“Stocks moved higher on hopes for a recovery and the improving outlook,” are the rationales most often supplied for lack of any better reasons that can be verified and substantiated. This obviously sounds much better than, “stocks rose on the back of phony growth from cheap money financed by higher debt.”
Granted, while the top line development has been a disaster, bottom lines have been improving steadily. However, while the results of effective cost management have produced rising EPS, one must know that this is simply not sustainable with prolonged flat and/or negative top line growth and no credible signs of future growth. Therefore, it is simply not a good enough rationale for pumped up share prices on steroids.
The outlook, the outlook, oh, the most splendid outlook! Have you ever wondered what happens when the outlook fails to materialize in the expected way? Case in point: AEP Industries (NASDAQ:AEPI). While the company’s top line had improved markedly during the past four years, the last 12 months show even slightly negative revenue growth, just as with our select stocks. Yesterday, its hyped stock did take an overdue mighty fall of 20% (and more to come!), when its results and — guess what — “the outlook” disappointed Wall Street.
“Outlook,” where art thou?
Be afraid, be very afraid! When all market participants, in particular the learned experts supposedly in the know, join hands in unison to confirm the trend and its prolongation, this is the mother of all red flags.
“My central principle of investment is to go contrary to general opinion, on the ground that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive.”
-John Maynard Keynes
Not too long ago, the final phase of Apple Inc. (NASDAQ:AAPL) Almighty’s upsurge to its inflection point was accompanied by unanimous consensus and (maybe not so) smart money conviction buys. Speaking of which: Where have all those Apple Inc. (NASDAQ:AAPL) $1,000 bulls gone? Did they vanish into the haze, or maybe the iCloud?
Remember, that those who do not know their history are condemned to relive it! The analyzed stocks are the first dominoes to tumble, long before those with solid fundamentals, when investors will finally come to realize that their emperors have no clothes.
Karl Ege is short Whirlpool Corporation (NYSE:WHR), Saia Inc (NASDAQ:SAIA), Snap-on Incorporated (NYSE:SNA) and AEP Industries (NASDAQ:AEPI). The Motley Fool has no position in any of the stocks mentioned.
The article Stocks Showing Serious Bubble Symptoms originally appeared on Fool.com.
Karl is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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