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Then and Now: Buyers Remorse Versus Sellers Loss

Over the past couple months, worsening macro economic conditions, declining corporate profitability and a bottomless stock market have investors longing for the good old days when the economy delivered steady increases in GDP growth with declining unemployment, and corporate profits and sales tended only go up, resulting in a rising market. When times are good, the emotional cost to putting money into the stock market is very low. Who does not remember how easy and fun it was to make money in the late 1990’s, when the market only seemed to go up? Conversely, today’s emotional cost to investing is very high with investors and market commentators viewing any suggestions to invest as an indication that they are speaking to someone that needs to be institutionalized.

Sadly, while the emotional cost to invest is very low when times are good the financial cost can be very high. Ironically, when the emotional cost to invest is at its highest investors are likely staring at the opportunity of a lifetime. We evaluated the market in March 2000 and October 2008 to understand what this means to investors in easy to understand terms – what sales growth was priced into stocks in March 2008 to justify their price, and what growth is priced into those same stocks today.


By March 2000, unemployment had fallen 4 consecutive years, to reach a historic low of 4.0%. Similarly, GDP growth from 1996 to 2000 consistently exceeded 3.5%, flirting with 5% during a couple of those years. By March 2000, the S&P had almost tripled in 5 years.

During this time period, Corporate America made investing easy. For industrial firms in the S&P 500, sales growth increased from 6% annually in 1996 to 13% annually in 2000, while 2000 EBITDA margin levels achieved a record high of approximately 18%. That environment created a reassuring backdrop for institutions and individuals to buy, and in the process ultimately drive stock prices to unsustainable levels. Using AFG’s Value Expectations process, we determined that in March of 2000 the S&P 500 Industrials required 22% annual sales growth to justify its market value, compared to its 9% average sales growth from 1992 to 2000. In other words, even these firms had to more than double their average growth rate for five years or investors would likely suffer negative returns. While the economic environment was very inviting to investors at the time, 2000 was a financial disaster for investors. Within 2 years the market had dropped over 40%, and five years later the S&P had only returned less than 1% a year.

October 2008 – Is That Blood On The Street

If March 2000 represented Heaven for investors to contemplate investing in the market, October 2008 will likely be remembered for representing Hell. Heading into the month, the economy had just endured $100 plus oil prices during the summer, GDP growth had ground to a halt and turned negative, recession fears were everywhere, and financial company failures were becoming common. By the time credit markets froze up, investors actively sought a cave to ride out the storm. Ultimately leading to the 30% selloff we witnessed during October 2008. Investors must now come to grips with what will likely be a horrible economic/corporate climate for the near future. This results in a very high emotional cost to “pull the trigger” and make investments today. While the emotional cost is much higher today than in March 2000, investors are being offered significant financial incentives to buy in today’s market.

Contrasted to the 22% sales growth embedded in S&P 500 companies in March 2000, today’s stock prices reflect that these firms will experience 3% annual sales declines over the next five years. Unlike 2000, when the market expected record growth rates, today’s market expects record levels of decline for these firms. Specifically, the market is pricing companies today to lose 15% of their existing sales over the next five years. While anything is possible, such a long-term pessimistic expectation creates a lucrative opportunity for investors. Similar to the over/under on a sporting event, today’s market line is very generous to investors willing to commit their capital on an intermediate term basis.

Winners and Losers History and Prospects: March 2000 Vs October 2008

While the S&P 500 lost 40% of its value 3 years after its March 2000 high, the return differential between firms with extremely pessimistic and optimistic expectations was striking. Applying AFG’s Value Expectations process to individual companies reveals how important it is to understand the expectations embedded in a security’s price. For example, in March 2000, 33 companies in our sample had negative sales expectations built into their price. In a declining market, this group of firms, with low to moderate performance expectations, actually returned a positive 50% over this period. Companies meeting this criterion included names such as: AZO, MO, HPC, and MAT. While these are quality firms, given the rich market conditions, they were the exception to the rule, as high market valuations created a dearth of world-class franchise available at modest expectations.

Today, over 150 companies meet the criterion of having negative sales growth expectations embedded into their current market valuations. Unlike 2000, today many world-class franchises are available at expectations reflecting a very bearish future. Names available at modest to low expectations today include: COH, CSCO, DOW, CAH, TGT, JNJ, UTX, SBUX, WAG, and many others. The complete list of firms pricing negative sales expectations is detailed in appendix 1.


Today’s market is very uncomfortable for investors to commit capital, as the macro environment is depressing, corporate news is generally negative, looming political changes seem unfriendly to investors, and for the last 16 months the market has been declining. This makes investors generally hesitant to “get back on the horse” and have a long-term horizon in how they evaluate investment opportunities. However, while the emotional environment is very poor for investing, the financial environment has become much more attractive with the October declines across all stocks classes. Investors willing to take an intermediate perspective on the market and identify stocks with low performance expectations are likely to be rewarded very nicely in the years ahead.



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