I blew it.
I know that sounds harsh, especially in a year as difficult as 2020. But in the Trader column each week, I try to help readers think about possible outcomes for the stock marketâ€”the potential risks and rewardsâ€”so they can make decisions about their investments and not be spooked by what might come next. And so while my calls on individual stocks turned out to be pretty good, itâ€™s my calls on the market that Iâ€™ll have a hard time living down.
The worst part is that I saw a downturn coming, if not exactly this kind of downturn. In 2018, I wrote that a bear market wouldnâ€™t come until 2020, and in November 2019, I warned that a downturn, as signaled by the yield curve, was looming and investors should be cautious. But I wasnâ€™t cautious enough when coronavirus arrived on the scene, and I was too cautious when the market bottomed. That mistake was made worse by the fact that I called for the Federal Reserve to act quickly and for a major fiscal package, but I didnâ€™t turn bullish when both happened.
Instead, I clung to the idea that the market would follow the typical bear-market pathâ€”a big drop, a bounce, and then a second drop, which would be the one to buy. But that second drop never came. And I stuck with that view for far too long, as I battled the realization that I had been incorrect and the fear that I would become bullish just as the market was ready for a pullback. I finally changed my tune in June, but by then the easy gains were gone.
That massive miss tarnished what was otherwise a decent year for the column. I argued to anyone who would listen that the presidential election wouldnâ€™t matter for the marketâ€”and it didnâ€™t. My stock picks, though there werenâ€™t as many hits as there had been in the past, were also solid, beating the S&P 500 index by one percentage point. I recommended buying Lennar (ticker: LEN) on Jan. 3, and the stock has gained 42% since then, outpacing the S&P 500 by 28 percentage points. I said to avoid AMC Entertainment Holdings (AMC) after its bounce, arguing that the movie business had been changed too much by Covid-19. Its stock has fallen 44% since then. And on Aug. 14, I recommended buying Target (TGT) before its earnings report in Augustâ€”and the stock has gained 27% since then, easily topping the S&P 500â€™s 9.5% rise over the same period.
Restaurants turned out to be a decent place to find opportunities. I recommended buying Starbucks (SBUX) in August, citing its potential for a big rebound once Covid-19 cases started to decline. Its stock has gained 22% since then, easily beating the S&P 500â€™s 5.3% gain during the same period. Even McDonaldâ€™s (MCD), which I picked on July 24, gained nearly 8% since then, even if it ended up lagging the S&P 500 by seven percentage points.
The same couldnâ€™t be said for my two worst picks. I recommended investors take profits on Apple (AAPL) in August after the tech titan announced that it would split its stock. Part of my argument was technicalâ€”Apple stock was trading 24% above its 50-day moving average, the most since 2008. Appleâ€™s rise was also due almost entirely to the willingness of investors to pay more for the stock, not because its earnings had accelerated. The call was the right one, but the timing was off. Apple stock peaked on Sept. 2, just a few days after the split, and has yet to regain that high. Still, the stock is up 16% since my call. Ouch.
It seems that every year I pick at least one energy stock, and every year that pick turns out to be a stinker. I picked Whiting Petroleum (WLL) in 2014 and 2015 before finally wising up, and it filed for bankruptcy in 2020. This year, it was BPâ€™s (BP) turn. The oil giantâ€™s stock has fallen 41% since I picked it on Jan. 24, 54 percentage points worse than the stock market over the same period, as the coronavirus recession caused oil prices to turn negative and called into question the future of big, legacy energy companies. It doesnâ€™t help that the market has basically accepted that renewable energy will replace oil and has started to price that in as if itâ€™s happening now.
Thereâ€™s still a lot to like about BP, however. It pays a 6.4% dividend and needs oil to average only $39 a barrel to cover its payout, according to J.P. Morgan analyst Christyan Malek. The company is already making progress in reducing its debt and could reach its target earlier than expected, resulting in the potential for even more cash return through share buybacks. Finally, BP is quickly changing its business for a world where oil is a less important source of energy. That has its risks, but itâ€™s an opportunity too. BP trades at a 12% discount to the sector based on 2022 earnings, so those risks are likely priced in.
Iâ€™ll probably regret it later, but BP looks like a good long-term bet.
Write to Ben Levisohn at Ben.Levisohn@barrons.com