Danger Will Roberts, Danger

As of today, I am sitting at about 17% in my brokerage/retirement accounts. Why?

• I had a very strong performance in January (20% in one account, 15% in another).
• I think inflation is still a problem
• T-bill rates are getting larger every week and become more tempting
• I don’t think earnings look as rosy as many think.

Outperformance

Much to my joy, my accounts had some fantastic performance in January. Rather than get greedy, I decided to take some off the table. I sold completely out of my Travelers (TRV) position. This stock was one of the best performers in the index last year; I did about 15% with it. I have a hard time believing it will outperform two years in a row. I think people are expecting higher rates (good for insurance stocks) and question how much of this is already priced into the stock. The risk-reward scenario doesn’t meet my requirements for individual stocks any more.

My Alison Transmission stock continues to defy odds, up over 30% in portions I bought in October. However, I did trim back this position and a little bit of the one I have in Marten Transport. I will probably continue trimming ALSN, but MRTN is something I plan to hold forever if I can.

Cigna is a long-term hold for me. However, it too, like TRV, had a wonderful year in 2022. It has been fading and slipping the last month. I question whether or not I should sell this and buy back in. They are long-term capital gains. Healthcare stocks have been underperforming this year.

Inflation

Inflation is still rearing it’s ugly head. My latest trip to the grocery store was still met with increasing costs. In addition, I still have my resume posted on job boards and recruiters are contacting me. While some companies have laid off employees, I don’t believe we are there yet. Employment rates are still too high given the inflation scenario.

Historically, inflation takes YEARS to get rid of. People are underestimating the impact of inflation. I’m not convinced that interest rates are coming down any time soon.

T-bill Rates

As I’ve already written about, T-bills continue to go higher and higher. The six month treasury is 5.132% as of today and the 1 year treasury is 5.096%. Investors take this into consideration when they decide to be in or out of the market. I think this can particularly hit dividend stocks. Why take a lot more risk for a 3-4% dividend when T-bills are paying more? I mean, there are reasons to take the dividend stock (locking in the yield longer, dividend growth) and so forth. However, it’s a decision investors face.

Furthermore, when you begin looking at risk-adjusted returns, the market doesn’t have to just return 5% to make it worthwhile. It has to return an amount that reimburses for taking on the risk. What would that be for most investors? 7%? For me, the market needs to return double digits to properly compensate me for all of the extra equity risk.

Earnings

While some companies have had good earnings reports, there are many that have mediocre reports. Let’s forget “expectations” for a moment because in some cases expectations were set so low, anything would have beat it. Look at the companies earnings now versus those in 2019, look at their margins, look at the trends. I think some companies are in serious trouble.

Lastly, I will reiterate, often the companies that outperformed the last five years will go on to seriously underperform the next five years. I think many investors are in for a rude awakening with some of these tech stocks. We got a rally in January and even now in some; however, I do not think the tech rally will hold (not financial advice, just my own opinion).

What have I been buying? What moves have I made?

• Westrock
• Kroger
• Cisco
• Bristol-Myers Squibb

Westrock and Kroger aren’t my favorite stocks in the world. However, I do think they are undervalued at these levels. Westrock had a pretty bad report and went down a good bit. I’ll take the valuation and dividend. I’ve owned this stock in the past. It tends to be one that I hold six months at most (a swing trade). The risk-reward ratio looks decent here.

Krogers also looks like a good value. I don’t like the decreasing margins, but I’ll take the current valuation. I got LUCKY on KR. The day after I bought, KR bumped up 5% and then went up again.

Cisco is one of those old standby defensive stocks. It had a pretty good report. However, CSCO has not been a great performer the last five years. I bought this to play defense in my portfolio. It pays a dividend and valuation isn’t terrible; I plan to sell this stock at some point in the next six months. Not a long-term hold.

I did sell some of my ITOT and IJJ positions. I sold the ITOT because I want more cash and I feel like the larger cap stocks are still overvalued long-term. I think we see a smaller correction and I’ll refocus my portfolio elsewhere.