Thursday, November 13, 2008
Investors can sometimes be so stupid.
I know that sounds harsh. But after what I've seen the past few days, I have no other way to describe it.
I'm not talking about investors who are willing to sell shares of General Electric below $17, even though the stock is trading at less than nine times earnings and pays a 7% dividend. Nor am I referring to traders who are jettisoning shares of Wal-Mart, even though the company blew away earnings estimates.
I'm also not referring to folks who sell shares of aluminum producer Alcoa for less than six times earnings and with a 5% dividend, or people who sell driller Rowan Companies at four times earnings and a 2% yield.
As stupid as all of those trades sound, at least one can argue that the fundamental businesses could suffer over the next few months and it makes sense to sell ahead of the suffering – no matter the valuation. So while I may disagree with all of the above trades, I would never say they were stupid.
When I say "stupid," I'm talking about investors who are willing to sell $10 bills for $7. And a lot of stupid people came to town this week.
Let me explain...
Boulder Total Return Fund (BTF) is a closed-end mutual fund that invests in common stock and debt securities. BTF started the week at $12.35 per share and closed yesterday at $9.12 – a drop of 26% in just three trading days.
Nearly 40% of BTF's assets are invested in Berkshire Hathaway – Warren Buffett's company; 14% are in Yum Brands; and another 7% is invested in Wal-Mart. The rest is invested in blue-chip stocks and high-quality bonds.
And while BTF has always traded at a discount to the underlying net asset value of the securities it holds, that discount has rarely been more than 10%.
Yesterday, the discount grew to 30%.
That's right. Buying BTF at $9 per share is like buying Berkshire Hathaway, and a whole bunch of other blue-chip stocks, for 70 cents on the dollar. To put it another way, the stock market would need to fall another 30% to justify the discount at which BTF is trading.
And the thing is... BTF is just one of dozens of closed-end funds trading at steep discounts to net asset value. You can see for yourself by going to www.etfconnect.com and searching for funds trading at discounts.
In 25 years of trading, I've never seen anything quite like this.
This is a unique, perhaps once in a lifetime, opportunity to buy stocks on sale. To let it pass by isn't just wrong. It's stupid.
Best regards and good trading,
USA Today publisher Gannett hits a new low... it's a one-way bet.
Another leg down for large-cap financials... Citigroup, American Express, Bank of America, Lloyds TSB, Barclays, and Credit Suisse hit new lows.
Internet commerce beacons Amazon and eBay at new lows.
Earnings today... Dr. Pepper Snapple Group, Nordstrom, Siemens, Wal-Mart.