Dan Ferris: Two sectors where you can still find value today

From Justin Dove, Editor, The Crux:

 The mainstream media is finally catching on to the “Melt Up” thesis…

Regular readers know we’ve been telling you about this idea since March. As Dr. Steve Sjuggerud wrote back then

We’re in the late stages of a great bull market. But the biggest gains tend to happen in this final stage… And that means stocks can still move much higher before the bad times arrive.

I call this theme “The Melt Up.”

Starting around October, we began to see this idea hit the mainstream press. On October 9, MarketWatch posted:

Is this the melt-up in the stock market before Wall Street’s meltdown?

On November 1, CNBC wrote:

Stock market poised for a ‘melt-up’ as it begins strongest months of the year

And on November 30, even infamous CNBC personality Jim Cramer got in on the party:

Cramer’s 10 reasons for why the surging market feels like a melt-up

Now that this idea is hitting the mainstream, we feel it’s our duty to start preparing you for the MeltDOWN. It always pays to be one step ahead of the crowd.

So I recently sat down with one of the world’s best value analysts, Dan Ferris, to see what he’s doing to prepare for the inevitable melt-down in stocks.

Dan pens the conservative Extreme Value newsletter, which uses the time-tested wisdom of famed value investors like Benjamin Graham and Warren Buffett. He was among the few newsletter analysts to accurately describe the breadth and depth of the coming financial crisis in April 2008. And he told investors to get out of small-cap mining stocks in May 2011, just before they went into a brutal, multi-year bear market.

So what’s on Dan’s mind today?

There’s three general pieces of advice that I think people should take if they want to prepare for what I believe is an inevitable meltdown because stocks, bonds, it’s all drastically overvalued at this moment.

First thing is, hold plenty of cash. Don’t go 100% to cash. I didn’t say sell everything and hold nothing but cash. I said hold plenty of cash. And the way you arrive at this is usually by selling what’s extremely overvalued and risky. And just not having anything else to put it into right now. That’s the first thing. Hold cash.

Second thing is sell short stocks of deteriorating individual businesses and ideally in deteriorating industries. For example, parts of the retail world are deteriorating (more on that below).

The third bit of advice is buy extreme value stocks when and where you find them because you will NOT call the top. So if you’re buying stocks with a sufficient margin of safety, businesses that are good enough at prices that are cheap enough, you’re gonna do well. We’re not calling the top. We’re just being cautious because there’s a lot of overvalued stuff in the world today. And some of it is worth zippo.

According to Dan, there are a couple of pockets where he’s still finding these kinds of “extreme” value stocks. Here’s what he told us:

So it’s not just pockets. But there are a couple pockets. And I think the golden age of value is just a little bit of scattered light in the dawn of the golden age of value. Mining stocks have been destroyed. And they’ve kind of bounced off the bottom. And you know they represent really good value. We have one of the best mining related companies and there’s one other company that I would recommend in Extreme Value. And we’re probably gonna cover it within the next two to three months.

That’s one thing. Retail is the other thing. There are pockets in retail that are not gonna go away and not get destroyed. And we found one of those already. So we’re short a retailer who think doesn’t get it and doesn’t understand their own problem. And has poor financial reporting. And we’re long one of the all-time great retail businesses because they do get it.

The retail space is creating confusion in the market Dan says. And that’s leading to great opportunities for investors that understand what is going on. He continued…

At this point it’s probably better known than it was a month or two, three months ago. The retail apocalypse is not a universal phenomenon that’s going to destroy every retailer except Amazon. That’s just not happening.

And in fact, I gave the example of clothing companies. Clothing was disrupted as much, a little more by fast fashion [than Amazon]. Zara, H&M, Forever 21 to some degree. As it was – moreso even than Amazon.  

More of that revenue went to fast fashion than went to Amazon. So it’s not exactly – and you know we still buy – all retail transactions, 88 to 90 percent of them still happen in stores. So you need stores. You need analog moats. You can’t just have a digital juggernaut forever. Frankly, online commerce is a difficult business to make money in.

This brings to mind juggernaut retail stocks like TJX Companies (TJX) and Burlington Inc (BURL). These holding companies own popular stores Marshall’s, T.J. Maxx, Homegoods, and Burlington Coat Factory. Not only have these stocks soared throughout the retail “apocalypse,” they’ve done it with ZERO online presence.

Burlington, for instance, is up 372% over the past 4 years.

Here’s what Dan said about these retail wholesalers (which he’s not recommending right now, by the way):

They know what they’re doing. They know how to buy. One of their key core competencies is buying whatever they can find any time of the year rather than the traditional department store model of buying seasonally and trying to look ahead 6 or 12 months. They don’t do that at TJ Maxx. They’re very opportunistic. Just like a good value stock picker.

So there you have it. Nobody can know when and where the top in the market will be… and when the meltDOWN will start. But smart investors can start preparing now… while still conservatively participating in the Melt-Up. Two places to look for value today are mining stocks and retail businesses that will stick around for years to come.

If you consider yourself a value investor, and want to discuss the markets with other like-minded investors, check out Dan’s new Facebook group, Value Investor Forum.

And stay tuned for more contrarian guidance right here at The Crux.

Regards,

Justin Dove

Crux note: Dan is also active on Twitter. You can follow him at @dferris1961 for updates on the markets – particularly the ongoing speculative mania. As always, he can’t give individual investment advice there. But there’s plenty more to talk about than that.

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