This post was originally published on this site
https://images.mktw.net/im-63037169
If you’re just going to chase the stocks that have already made the most money, forget the so-called “Magnificent Seven,” or even the GRANOLAs.
And buy the “BENTPAKs.”
These are the seven stocks that, the Dow Jones Markets Data team tells me, have produced the biggest total shareholder returns over the past five years. They are Builders First Group
BLDR,
Enphase Energy
ENPH,
Advanced Micro Devices
AMD,
Quanta Services
PWR,
KLA Corporation
KLAC,
plus two “Magnificent 7” members: Nvidia
NVDA,
and Tesla
TSLA,
Average return since the start of March 2019: Just under 1,000%. You got back 11 times your money. Booyah!
You might figure buying the BENTPAKs sounds like a pretty stupid investment idea. After all, it surely makes no sense to rush out and buy the stocks that have already risen the most in price, right?
Right. But this, of course, is what everybody does anyway. Chasing the Magnificent 7, chasing the Nasdaq Composite
COMP,
even chasing the S&P 500
SPX
— what is the crowd doing but buying the stocks that have already gone up?
So, let the record show that the BENTPAK strategy is already the conventional M.O. on Wall Street and is probably running rampant in your 401(k) and IRA right now. You probably have most of your money in U.S. stocks and stock funds, because they have been doing so much better than international stocks. And within those U.S. stocks and funds, you’re probably most heavily invested in the stocks that have already risen the most — because that is how index funds work.
Congratulations. Ten seconds ago you were laughing at me for coming up with an investment strategy as stupid as the BENTPAKs. Now you’ve discovered it’s the one you’re using in your own portfolio.
That brings me to the best counterintuitive research note I’ve seen in quite a while, from Liberum investment strategist Joachim Klement. He admits that, yes, U.S. stock prices have wildly outperformed European stocks over pretty much any recent period you can mention — say five, 10 or 15 years. But, he says, the same is not true for per-share earnings: The fundamentals that give stocks their value.
On the contrary, he says, over the past five years European stocks have produced superior growth in earnings per share. Since the start of 2019 the companies in the Europe Stoxx 600 index
FXXP00,
have raised earnings per share in total by 49%, he calculates. That’s an average of 8.3% a year.
Companies in the S&P 500 over the same period? Try 38% — a full 10 points lower. That averages 6.7% a year. Actually, the U.S. performance over that period is barely any better than the performance of the top 350 companies in the moribund London market.
This is a huge turnaround from the previous 10 years, when U.S. companies grew earnings much faster.
“There has been a critical shift in earnings growth in recent years that, unfortunately, has gone unnoticed by investors,” Klement writes in his note to clients. “EPS (earnings per share) growth in the U.S. has slowed significantly and is now well behind what can be achieved in Europe.”
This is a huge turnaround from the decade following the global financial crisis, from 2009 to 2018, when U.S. stock earnings rocketed while Europe was walloped by banking and credit crises, Brexit and slow growth.
European companies (including many in the U.K.), reports Klement, have been buying back stocks, lowering their share count and improving their earnings per share.
But while European companies have been doing better on the fundamentals, that hasn’t been matched on stock prices. Instead, as noted, U.S. stocks have been rising more and more, leaving European stocks in the dust.
The net result: U.S. stocks have become increasingly expensive compared to their earnings. European stocks, not so much.
At this point, the S&P 500 trades at 21 times forecast earnings for the next 12 months. That is almost twice the equivalent rating for the U.K. (11 times forecast earnings) and 50% more than the rating for the Europe Stoxx 600 (14 times). The dividend yield on the S&P 500, at 1.5%, is less than half that of Europe and a third that of the U.K.
At this point, the main argument for still being overinvested in U.S. stocks is the BENTPAK argument — they’ve gone up a long way, so we should own them.
Meanwhile, my only quibble with Klement’s analysis is his use of the word “unfortunately.” Actually, it’s good when other investors behave irrationally. It creates an opportunity for the rest of us — to make sure we have plenty of money invested in international stock funds. That’s because, sooner or later, prices will follow earnings.
