Update 499: Inflation, J&J, Scoring System, Focus on Valuations
4Mar23 $JNJ on NYSE
Dear Friends of Purple Chips,
On Thursday the Dow was at 33,000, down about 1,000 points from 2 weeks ago. Inflation remains the big pre-occupation.
In this weekend's video, we look at the following:
The need to stay focused on the big picture instead of looking at inflation on a micro basis;
Our justification for changing the position size of Johnson & Johnson;
A different way of presenting our scoring system that should make it easier to understand;
We discuss the importance of staying focused on valuations;
Broken clocks;
Next video is March 18th.
NEW: Further down you will find the Update transcript and an alternative audio with adjustable speed that you can use while reading the transcript.
Please click below for:
Please Click Play to see the Update:
Alternative Audio
Here’s a synthesized version of the audio based on the transcript. You can adjust the playback speed as desired.
Transcript
Welcome to the Purple Chips Update #499 for March 4th, 2023. I'm John Schwinghamer, the author of Purple Chips. Please pause the video to read our disclaimer.
On Friday, the Dow was around 33,000. And this is down about a 1000 points from two weeks ago. The market has been twitching in the low 30,000 zone with every inflation update.
And on that point, I'll start with this spotlight comment that discusses monthly changes in European inflation. The reason that I'm showing you this is to make a point. The market is obsessed with inflationary trends and sometimes things can get silly. I think it's ridiculous to analyze inflationary trends on a monthly or micro basis. The bottom line is that inflation is high and will probably remain higher than what we've been used to in the last twenty years. Because the global economic landscape changed dramatically in the last two years: there was COVID, a disruptive amount of easy money that was thrown into the economy, supply chain upsets, and then the Russia-Ukraine war. Together these events shook up the normal that we were used to, and it will take some time before the markets and investors adjust to this new paradigm. My conclusion is that the bull market of the last 20 years is over. And now we're in an adjustment phase that will see lower P/E ratios, more rational valuations, and a higher focus on dividend yields.
Now here are the stocks that are trading at low valuations.
And we made one change in our US holdings. On February 23rd we increased J&J to Regular Weight at $157.62. We went from an Underweight position to a Regular Weight position, because we may add more if there's further weakness. Here's the chart of J&J with the earnings line in white. Our reluctance to go to an Overweight position is because there's one gray cloud on the horizon. Last year, J&J declared bankruptcy in one of the divisions so that they could avoid litigation related to the talcum powder lawsuits. And it seems that the courts may overturn their move to bankruptcy, which would expose them to further litigation. And you can see in this chart that the position of the earnings line is way below the average trading price. This shows that J&J is already discounting some of the bad news. It's hard to say how much lower the stock can go. But our view is that large companies like J&J face these kinds of problems every few years, and they usually overcome them. In this slide, you see the earnings forecasts by the analysts which are still positive and the historical P/E ratios would show that the current P/E of 15 times is on the low end of the range.
Now I'd like to move on. I'd like to explain a modification that we made in our scoring system. We're now expressing the score for each stock in percentage terms rather than in points. We had a lot of questions about scores in the last few months and we think this change will make it easier to understand them. In the screenshot that I have here, you see that for Alphabet, or Google, I've circled the sector and the score in red - Alphabet has a score of 89.6%. This means that it ranks among the highest scores for the Communication Services sector. I've also circled the sector and the score for Visa: it has a score of 93.1%, which is the highest score in Financial Services. Note that this doesn't mean that Visa is better than Google - it just means that they are each the highest ranking in their respective sectors.
Onto market lessons. There's been a lot of negative press about the market lately. And I want to remind you of a few lessons I've learned over the last four decades. Number one, what you read or hear in the media may already be factored into current valuations. Number two, don't let your short term negative view of the market stop you from buying a good deal. Number three, the media is always trying to figure out where the market is going. You know that timing the market is impossible. As the same goes even a broken clock is right twice a day. Number four, focus on individual company valuations. A company at a low valuation will probably drop in price if the market declines, but it will likely drop by less. And when the market does turn up, it will usually appreciate faster.
Our next video will be on March the 18th. This will be video #500, which will mark 10 years of producing weekend videos. And now it's time for a change that we think will be better and more productive. We'll be going to a blog style interview that will be more flexible and interactive. You'll get a notification every time there's a new blog post and the post will be in response to events or situations that relate to our investments. I'm excited about the change and I'm certain you'll like where we're going.
As always, if you have any questions about this video are about Purple Chips, please don't hesitate to contact me at info@ purplechips.com. So I'm back in Montreal this week, and in Ottawa and Toronto over the next month and then it's back to the island.
So that's it for this week. I'm John Schwinghamer, the author of Purple Chips and thank you for listening.
Transcribed by https://otter.ai