Yes, You Should Be Buying Today

The 'smart money' wanted stocks to sell short...

Yet we saw amazing buying opportunities ahead.

In April 2009, investors were still reeling from the Great Recession. At Valens Research – our institutional arm, which powers Altimetry – our clients expected more companies to fail. They wanted to bet against those stocks.

They had good reason to be afraid. That March, the S&P 500 had fallen to its lowest level since the mid-'90s. There were few indications that the storm would abate. All signs pointed to a continued freefall.

Folks were still worried that their banks had toxic mortgage assets on their balance sheets. Credit markets still weren't fully functioning, and the effects of the credit seizure were widespread.

In short, everything was a mess... and anyone in their right mind would have been looking for short ideas. It wasn't exactly revolutionary to bet that more stocks would collapse.

As I'll explain today, our clients were too focused on the pessimism that pervaded the market. They ran the risk of missing some fantastic opportunities... and all they had to do was look in the right places. The current market environment reminds us a lot of what happened back then.  

Opportunities abound... if you do your due diligence.

Investors who were watching the Great Recession unfold had good reason to be pessimistic.

U.S. companies were in a rough place. Average corporate high-yield credit default swaps ("CDS") were well above 1,500 basis points ("bps")... meaning it cost investors 15% per year to protect their credit investments.

When a company's CDS levels get above 1,000 bps, we typically use that as a proxy for the market's view of risk. It tends to mean investors are pricing in bankruptcy.

Even worse, net income for the S&P 500 was negative for the first time ever. And U.S. consumers hadn't even begun to repair their personal balance sheets.

And the list went on... The cost of servicing household debt as a percentage of disposable income remained high. Credit-card, mortgage, and auto-loan delinquency rates were still rising. So was unemployment.

We can't blame our institutional clients for expecting the worst. What they failed to consider was this...

Even in the worst market crisis, there's always a silver lining.

In the midst of all this bad news, we got to work. And we found opportunities hidden all across the market.

When we dove into the Uniform Accounting data and used a disciplined investment process, it was surprisingly difficult to find stocks that were poised to fall. That was true despite the bleak environment. The worst news had already been priced in.

For example, any company with any semblance of credit risk was trading as if the apocalypse had hit. Their prices suggested that even smart, well-run companies with little or no debt would never recover.

All that bad news was precisely the reason for an incredible, looming opportunity.

Given how cheap everything was trading, we saw strategic acquirers as a great bet. These companies would be able to buy small competitors at a huge discount, improve their operations, and become stronger as a result.

That's just what happened with Middleby (MIDD). The company sells machines for restaurant kitchens. Think industrial grade ventilation systems, deep friers, and dishwashers.

We included Middleby in a presentation for our institutional clients in April 2009. The company made more than 50 acquisitions in the decade following the Great Recession... and its stock soared more than 1,100%.

In other words, a perfect confluence of trends made for a great discount. It was also a perfect profit setup for investors who could correctly identify those trends.

We're seeing a similar pocket of buying opportunities today...

Of course, every market environment is different. So investors are once again wondering if this is the right time to buy... or if they should hunker down until the volatility subsides.

Regular readers know that we're certainly not "pounding the table" on everything. We've sounded the alarm on areas like Software as a Service, the last remnants of the at-home revolution, and nearly anything that has to do with real estate.

Credit is tightening. Some companies are starting to have debt issues. And other market signals are flashing red. It's good for investors to be wary.

Now isn't the time to start loading up on cheap stocks indiscriminately. All the same, there are buying opportunities in specific pockets of the market. You just have to look for them... and do some careful research.

Regards,

Joel Litman
May 10, 2023

Editor's note: According to Joel, in less than 60 days, a key catalyst is set to move more than half of the U.S. stock market – impacting more money than all the recent regional bank collapses combined. He says this critical moment will send some stocks soaring, while slashing others as much as 90%.

That's why if you have any money in the market, he's urging you to heed his latest warning...

Tonight at 8 p.m. Eastern time, Joel will detail what to expect from here... how to protect your portfolio... and share the name and ticker symbol of his No. 1 stock to steer clear of today. And he'll explain how to access his "blacklist" of stocks to avoid at all costs in the coming months. Click here to learn more and RSVP for free.