Feeling Left Out During the Mega-Cap Only Rally? You Are Not Alone.
Contrarian souls who know their market history should be doing this right now. Here are the specific moves I've been making.
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Unless you are an index fund investor, where ETFs and funds are required to own the largest-cap names in proportion to their dominance in an underlying index, you are likely to be feeling bewildered by your underperformance lately.
Buyers of “value stocks” like me have been suffering as already cheap stocks have been getting even cheaper while clearly pricey names have mostly continued to see multiple expansion.
The book title below sums this recent price action up nicely. When stocks are at incredibly great valuations due to P/E contraction, and extraordinarily attractively priced, you will not want to buy them.
They have low multiples, higher-than-typical yields (if they pay cash dividends), and sell for fractions of the prices which they used to command.
These stocks also have truly horrible share-price momentum. That makes them unbuyable for those who worship at the church of what has been working lately.
The same principle applies to the broader market in general. The American Association of Individual Investors (AAII) conducts subscriber surveys each week which track “Mom & Pop” sentiment levels of bullishness and bearishness.
As of Thursday Jan. 16, 2025, there were few bulls to be found with only about one quarter of individual investors happy about what had happened to their portfolios recently. Poor performance led to a lack of enthusiasm regarding future prospects.
The converse was also true. Bearish feelings were prevalent to a degree rarely seen except at what turned out later to have been significant inflection points in the broader market.
Do not simply trust me on that. Judge it on what the S&P 500 index ETF SPY did from some of the most extremely bearish periods shown above.
When negativity rose to about 50% in March of 2023, the bottom was in. Over the next three months the SPY surged by just over 17% plus a quarterly dividend payment.
When things appeared bleakest it was terrific time to buy.
The broader market fell sharply during each of the three months from early August through late October of 2023. That was almost 90 days of sheer agony for people watching their statement values go down almost every day.
By late October 2023, bulls were at extremely low levels and bearishness was the highest in a two-year stretch. Right as October 2023 was ending it was like somebody threw a switch.
Over the next five months the SPY jumped about 28.4% before an April 2024 selloff interrupted the party. Bearishness up-ticked a bit and stocks then proceeded to rise through most of June.
The six-month period from October 2023’s bottom through the June 2024 top registered a solid 34.9% plus dividends, total return.
A similar pattern played out when you measured market action from that interim sell-off in April of 2024 through mid-December of 2024.
The sharp declines from last July’s peak through early August sent negative vibes spiking higher. Buy-the-dip traders once again made out great. From an Aug. 4, 2024 low of about 510 the SPY rose to about 612 by early December.
From the April low through December’s peak the SPY rose by 23.6% plus a couple of quarterly dividend payments.
Now, despite continued strength in some of the mega-caps, bearish sentiment is near the highest levels of the past two years.
Contrarian souls who know their market history should be snapping up shares of firms with solid underpinnings which have sold off disproportionally to any company-specific news.
I have added tremendously to beaten-up names like Jack in the Box JACK, Caleres CAL, Sonoco SON and Dollar General DG in recent days as they made new 52-week or even multi-year lows.
I am not immune to hating seeing their current values on my brokerage statements. 46 years of trading, though, has taught me to gut it out knowing the odds are highly in favor of seeing all of those recover brilliantly over time.
JACK’s all-time high was $124.51. It closed last week at $38.66 while yielding 4.55%.
Caleres carved out an all-time high of $44.51 last August. It closed at a new yearly low of $19.75 last Friday, yielding 1.42%.
Sonoco fetched $61.73 last May and is poised for a record profit year in 2025. It touched $45.93 briefly last week before bouncing back to $47.75 on Friday. It yields 4.36% at its current dividend rate. SON is a Dividend Aristocrat. Cash payouts have been in effect for 99 years and have been raised annually over the most recent 41 years.
Dollar General changed hands between $225 and $262 during each of the four years from 2020 through 2023. It set a new seven-year absolute low of $66.43 intra-week before closing at $67.68 last Friday. It now yields 3.45% while selling for about 11.1 times Value Line’s very conservative $6.20 EPS FY 2025 estimate for it.
DG’s 10-year median multiple has been 19 times. Its current yield is more than double its normalized 1.7% rate.
Ironically, it takes great courage to buy or average down on stocks like these. Few analysts are willing to recommend shares which have been severely wounded and sport terrible technicals.
Smart investors, with reasonable time horizons of six to 18 months or more, are quite likely to see oversized gains while pocketing money market-like yields on all but CAL.
At the time of publication, Price was long shares and short options on all individual stocks mentioned. He has no positions in any index ETFs or funds.
