Demonstrators holding letters to form a banner take part in a protest against the European Central Bank, in Trafalgar Square, London, over Greece's debt repayments, Monday June 29, 2015.Daniel Leal-Olivas/The Associated Press
John Reese is CEO of Validea.com and Validea Capital, and portfolio manager for the National Bank Consensus funds. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service. Try it.
The "Grexit."
In addition to offering the most egregiously lazy example of the media's obsession with catchy word combination (edging out "Snowpocalypse"), Greece's potential exit from the European Union also offers a crucial investing lesson.
Speculation about a Greek departure from the EU has dominated the headlines all year, with the possible impact on the EU described with words such as "contagion" and "collapse." You can bet that has had plenty of individual investors steering clear of European stocks.
But investing based on economic headlines is a dangerous game. In its annual Quantitative Analysis of Investor Behavior, Dalbar Inc. listed "Media Response" (the tendency to react to news without reasonable examination) as one of nine behaviours that plague investors – the average U.S. equity mutual fund investor has gained just 3.8 per cent annualized over the past 30 years while the S&P 500 has returned 11.1 per cent annualized.
Indeed, if you have been staying away from European stocks this year because of the Greece headlines, you have missed out. Vanguard's European Stock Index Fund is up more than 9 per cent in 2015, and by focusing on more fundamentally sound European equities, you could have gained even more – a 10-stock European portfolio I track on my research website is up 21 per cent (through June 24, exclusive of dividends and trading costs).
One reason headline investing fails is that by the time you get bombarded by headlines about a particular crisis, big institutional investors – which account for a huge chunk of the market – are well aware of it. The risk is already to some degree baked into stock prices. Plus, a myriad of factors influence stocks at any given time. In 2015, Grexit risk has been more than offset by other factors, including Europe's major quantitative easing efforts.
So many factors affect the economy and stock market, in fact, that "experts" whose opinions make headlines often end up being flat-out wrong. How many experts forecast a recession and financial crisis prior to 2007? Not many. Conversely, how many pundits spent much of the past three or four years predicting a U.S. recession that has yet to materialize? Quite a few.
"It's lovely to know when there's recession," mutual fund legend Peter Lynch once quipped in an interview on PBS's Frontline. "[But] I don't remember anybody predicting [that in] 1982 we're going to have 14-per-cent inflation, 12-per-cent unemployment, a 20-per-cent prime rate, you know, the worst recession since the Depression. … So I don't worry about any of that stuff. I've always said if you spend 13 minutes a year on economics, you've wasted 10 minutes. … I deal in facts, not forecasting the future. That's crystal-ball stuff. That doesn't work."
In terms of facts, top mutual-fund manager David Herro recently told CNBC that the fact is that European financials have very little exposure to Greek debt right now. Mr. Herro says that doesn't mean European financials won't take a short-term, emotion-driven hit if Greece leaves the EU. But he thinks good businesses will manage just fine. He likes European stocks, many of which (despite this year's European stock gains) remain quite cheap.
So do my Guru Strategies, which are based on the approaches of such investing greats as Mr. Lynch and Warren Buffett. Here's a look at a trio of stocks that my models think are worth a good, long look right now – if you are willing to think long term and have the stomach to ride out any short-term, emotion-driven ups and downs.
Ireland-based King has created such mobile device games as Candy Crush Saga and Pet Rescue Saga. The company (market cap $4.4-billion) gets strong interest from my Joel Greenblatt-based model. The approach likes its 22.7-per-cent earnings yield (earnings before interest and taxes/enterprise value) and 115-per-cent return on capital (EBIT/tangible capital employed), and ranks it as the best stock in the market.
This Netherlands-based oil and gas giant is composed of a group of energy and petrochemicals companies in more than 70 countries and territories. The $190-billion-market-cap firm has taken in more than $375-billion in sales over the past year.
Energy firms have gotten hit hard over the past year, and Shell is no exception. But my James O'Shaughnessy-based value model thinks it's a bargain. This strategy likes Shell's size, solid $11.35 in cash flow per share (versus the market mean of $1.72) and impressive 6.4-per-cent dividend.
BASF SE
This Germany-based chemical company offers a variety of products that range from chemicals, plastics and performance products to crop-protection products to oil and gas industry products.
Another favourite of my O'Shaughnessy-inspired model, it has $84-billion in annual sales, $10.84 in cash flow per share and a 3.3-per-cent dividend.
Disclosure: I'm long RDS.A and KING.
John Reese