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There’s a lot of talk about the market falling substantially. Some people, such as Jeremy Grantham, said that the S&P could fall 50% from its peak.
Let’s test a hypothesis between the 1st of October, 2007, and the 1st of March, 2009, also known as the financial crisis, the S&P 500 fell over 50%.
The German Dax also fell 50%, for instance, the Indian stock market. This is to say that those falls were coincidentally all 50%, although those countries are quite different from each other and their listings are very different from each other.
The NASDAQ fell nearly 50%. It was about 47% down. And the FTSE 100 fell 41%, barely any solace.
The Chinese 50 index fell 57%. If you thought there would be some geography you could hide in during those falling markets, you would be mistaken, which begs the next question.
Well, actually, why don’t we test? Let’s start with the S&P 500 of the 500 companies on that today. Did any of those companies actually rise in that period?
The only ones which are still in the S&P500 and which were up – well, there are 12 companies.
Netflix. I'm not sure many people will want to get into Netflix right now, but Netflix was up 70% during the paradigm mentioned from 2007 to 2009 AutoZone, Illumina, Advance Auto Parts, and Ross Stores.In a recession, you could argue that people not having much money meant Ross Stores would do well. Edwards Life Sciences, Walmart, again, consumer company, where you’d expect people on a budget to go to. Gilead Sciences, MasterCard, Church & Dwight, O’Reilly Automotive, and Tyler Technologies.
You can see there were three automotive companies. Again, let’s look at if these companies have something about them which is peculiar to them doing well.
Well, it doesn’t matter how they did back then. To some extent, let’s have a look. If they have good fundamentals right now, based on my value, growth income algorithm, the following have a seven, eight, or nine.
They are AutoZone and MasterCard. You might say, well, you’re too stringent. Tell me about some sixes. Okay. Advance Auto Parts and Ross Stores.
Walmart is a six. So is Gilead Life Sciences. So is Church and Dwight Company. I’m not going to go below six because I tend not to.
What about then a measure of valuation? Just add an extra column on there.
And also maybe give us some extra information about their cash flows. For instance, something that you particularly think will be important.
Let’s do that. Let’s add those two numbers and see what happens to the companies I mentioned. Do any of them have a price-earnings growth ratio below one?
Well, yes. Advance Auto Parts does currently, and so does Walmart. So Gilead Sciences and Tyler Technologies are pretty much at one.
What about cash return on capital invested? CROCI. Anything impressive? Remember, I look at this metric because I’m looking for companies that are in the top quarter by cash return on capital invested and the amount of cash they generate. After all, they tend to be the ones that can often outperform over the long term.
AutoZone has a 36% cash return on capital invested; Advance Auto Parts is 11%. Ross Stores is 12% Edwards Life Sciences, 20%, and Giliad is 18.
Conclusion
Now many companies survived the market falls of 2007-2009. If that happens again, we will have to be mindful of what happened, be picky in our stocks, sometimes be willing to hold cash, and other times hold through the falls too.
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Alpesh Patel OBE
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