Y H & C Investments November 2023 Update- Edition 182

Paying attention to the discarded and unloved......

Halloween Horror- October Shows Market Past Holds True!

Return figures in this section come from the October 31, 2023, edition of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

One of the mandatory subjects for students is history.  It is the study of the past to understand how the current situation exists.  In terms of the stock market, October has been the month where the largest market drawdowns (crashes) have taken place.  The most famous market crash was in 1929, and a great deal of that can be attributed to enormous margin usage.  This year, October was another month where many stocks performed very poorly.  This time, the margin does not appear to be the cause.  Instead, the fear of a hawkish Federal Reserve intent on raising interest rates is the prime culprit.  The Fed remains committed to the thesis of inflation being the number one enemy in the current economy.  With the fastest interest rate tightening cycle in history, the current 10-year treasury bond yield sits at a shade under 5% (4.869%).  A year ago, very few market participants predicted the massive tightening cycle.  As such, risk assets have been sold and anything considered to be higher than market risk is shunned.  Companies thought of as having too much debt are sold, as are smaller entities.  Add into this group consumer-related holdings, and the universe of stocks which have been crushed is quite large. 

The key question to consider is what affect the higher interest rate level is going to have on the economy?  Consumer spending comprises nearly 70% of economic activity for US GDP.  With student loan liabilities again requiring repayment, across the debt landscape, all loan forms require higher rates for consumers and businesses.  Greater interest payments are going to affect the economy and may do so in a much more adverse way than the Fed or its economists are considering.  With last quarter’s GDP print at 4.9%, the health of the consumer is front and center for market participants.

Y H & C In October- Observing the Unnoticed

Flying to a different city is always a unique experience.  In Las Vegas, like many other airports, you need to get to the airport well ahead of time before your flight, usually a few hours.  A few weeks ago, I traveled to Los Angeles and flew with Southwest Airlines.   The flight was short, less than an hour, and then I hailed an Uber to get a lift to the hotel.  When I got there, the Luxe, it was prepared for the LD Microcap event, so the lobby was busy.  I was tired and hungry, so I went to the restaurant after dropping my bag off at the bellhop.  The Luxe is kind of a dated, smaller, boutique hotel but it hosted the LD Event for many years, so I know the place. 

In the restaurant, it was empty, maybe one or two other guests.  I ordered my typical, some fries, and a small pizza.  One of the other parties left, so there were only two people in the restaurant: me and another older gentleman.  I asked him if he was there for the conference and he said yes, so we struck up a conversation.  He was the CEO of a presenting company and naturally, I asked for more details.  It turns out they have a nice business with solid financials, and I was somewhat familiar with it already.  I then asked him about Wall Street, and he told me he could care less about them.  Essentially, his attitude was it does not matter if large institutional investors don’t own the stock. They have their own investors.  The company is well positioned, grows nicely, is strong financially, and they can buy back stock when it is cheap (as they already have), or make opportunistic acquisitions (which they also just did).  We exchanged cards and I then sat in on his presentation the next day.  There were not many other investors there.  Perfect, just how I like it.  The stock is now on my radar screen, as it has been for a while.  It is why I try to pay attention to things many others do not. 

Y H & C Industry & Holdings Update- Disagreeing with the Market! (YH & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

October was a very difficult month for equity owners of all indexes in the United States.  You can count us as part of the group.  Over the last decade, the flow of money for stocks has been concentrated in the largest and most well-known companies in the world.  They are called the magnificent seven, but let’s round up, maybe ten companies. If you have not owned these companies, your equity returns have suffered.  Historically, this situation is typical, but not to the extreme degree that exists today.  Investors are saying the only thing they want to own are the biggest and most popular companies.  Why is this?  It could be the fear of geopolitical events.  Ukraine, now the beginnings of potentially a long war in the middle east, and maybe something happens with China and Taiwan.  Maybe it is the fear of the unknown, of the existing fiscal situation in the United States (33 trillion of debt and counting).  It could be anything, but clearly, investors don’t want to own 95% of all the stocks on the indexes.  It means there are all kinds of companies which are now trading for prices which are interesting.  Above all, as someone who is paid to make money for their investors, I must want to own the companies we buy.  Why do we want them?  There are usually a multitude of reasons. (Special assets which are irreplaceable.  Great unit economics.  A highly regarded brand.  Scale.  Network effects.  A low-cost provider.  History of good returns.  Highly profitable business model.  Management team with skin in the game.  Attractive capital structure.)  The market doesn’t want them, but I do.  The important question is am I right about the company?  Time will tell.  I don’t mind disagreeing with others.  It can be frustrating to have the markets tell you each day what you own is worth less.  However, markets change all the time.  In due course, we will find out whether I am right.  Maybe we can get others to see our point of view.  Specifically, I remain focused on companies we already own, smaller companies, real estate, and financial holdings.

The LD conference is always eventful, and I met with nearly twenty executives from a wide variety of enterprises.  We already own several, some in more size than others.  A few were companies which I have been monitoring, and some I just wanted an introduction to the management to learn more about their business.

The next few weeks are all about earnings reports and I have been busy listening to calls and reading transcripts.  Currently, the environment is harsh, and many entities are being punished for trivial reasons.  As the market is also amid tax loss selling, being prepared for potential opportunities is usually a pretty good approach at this time of the year. 

If you have questions or problems I need to know about, please email me at information@y-hc.com

Thanks for reading the newsletter this month, and if you think it is worthy, recommending it to a friend or family member would be appreciated.   

(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives. Past performance is not an indication of future results, and you may lose your principal by investing in stocks.