Three Stock-Picking Lessons From 2020’s Crazy Pandemic Market

This post was originally published on this site

A Tesla model S sits parked outside of a new Tesla showroom and service center in Red Hook, Brooklyn

Spencer Platt/Getty Images

I have always found the postmortem helpful. That is the exact language I used in my look back at my stock picks for 2019, and it is still true.

Considering what went wrong, as well as my successes, has helped improve my stock-market skills. (Insert self-effacing joke about those skills here.)

As 2020 winds to a close, it’s time for more reflection. I’m glad to see this pandemic year in the rearview mirror, but it did offer a few investing lessons. Here are three.

When the Going Gets Bad, Buy Stocks

‘When there is blood in the streets, buy real estate,” is said to have been a Roman proverb. That thinking still works today: The best time to buy stocks is usually when the outlook is the darkest, as it was in late March and early April.

It was a particularly frightening time to be in the market because few people who lived through the 1918 pandemic are still alive, and none of them was old enough to have been investing back then. The S&P 500 bottomed out at less than 2,200 in late March, for a scary 55% drop from its pre-pandemic highs.

Of course, the outlook improved and the market is about 70% above that low.

it would be easier if investors could live backward, making decisions today based on what they already knew happens in the future. But we have to stick with common sense, calm, and an understanding of how the economy works.

One might assume I learned the blood-in-the-streets lesson by recommending a lot of stocks in March. Not really. I learned it, I hope, by recommending packaged-food stocks in April,a call that has proved too conservative. Those picks are some of the year’s underperformers.

Calling the Top of Bubbles Is Hard

To be fair (to me, which is critical, in my view), I did write on March 20 that it might bet the best time to buy Tesla (TSLA) stock ever. That successful call wasn’t because I had great insights about the electric-vehicle market. It was based on how Tesla stock trades relative to analysts’ price targets.

Tesla stock nearly always trades for more than analysts say they think it is worth. But on March 20, Tesla stock was at about $85 and the average target for the stock price was $100.

The Street was screaming “Buy Tesla,” and anyone who did was rewarded.

Still, it was tough for a value investor—I consider myself one—to hang on for the ride. I recommended taking profits in the summer after a 250% rise in the shares to around $300.

That wasn’t a good call. The stock is now at about $663, while the average of analysts’ price targets is about $408. Tesla is now the world’s most valuable car company by a wide margin. Its performance has sparked a stupendous rally in everything EV-related.

Are EV and EV-related stocks in a bubble? I think so. That doesn’t mean Tesla isn’t fantastic and changing the world. But we recommended caution again in December, writing it was time to take profits in Chinese EV producers such as NIO (NIO).

Maybe that call will prove too conservative again. Or perhaps the recent comparisons between EV companies and the internet stocks of the late 1990s will turn out to be correct.

Holding a Lottery Ticket Isn’t a Bad Idea

Tesla has been an incredible story. It went into the S&P 500 this month as the most valuable company ever added to the index, and with the largest weighting. Shares were up about 670% year to date, as of the close of trading on Monday.

Tesla stock is an outlier in another way. Shares of large companies don’t usually go up 600% or 700% in a short period. Investors wouldn’t expect Google parent’s Alphabet (GOOGL), for example, to rise 500%, making the company’s stock worth $7 trillion. That scenario feels impossible. Huge gains are usually reserved for smaller companies.

That’s why it’s a good idea to have a few, smaller, higher-potential stocks in a portfolio. There were a couple of speculative recommendations that worked out well this year—and Barron’s didn’t completely miss out on the EV boom.

We recommended BYD (1211.HK), a big maker of EVs, in January in a Trader column and suggested buying the small-capitalization commercial EV maker Workhorse (WKHS) in the summer. Workhorse in particular was a small player without profits, but with potential.

My Resolution: Make My Brain Work Faster

This year’s stock market didn’t give people much time to evaluate things. Stocks went from a bull market to a bear market—usually defined as a 20% drop from highs—in the blink of an eye. The recovery from pandemic lows felt even faster.

After the March lows, the Dow Jones Industrial Average had its best quarterly performance since 1987 from April through June. There was almost no time for conservatism, or to figure out what was going on.

It feels like the pace of change in the world and the market is accelerating. So I want my brain to work faster. We’ll see if I’m successful achieving that goal, though measuring the results could be difficult.

The Score

Overall, I had an acceptable year. Most stocks I picked had positive returns and outperformed the market. That’s good enough for a performance review. Being more precise wouldn’t be fair to individual investors and portfolio managers, who have to make their calls with real money on the line.

For 2021, I am high on industrial stocks because a reopening economy should send demand through the roof. Caterpillar (CAT), Eaton (ETN) and Parker Hannifin (PH) all stand to benefit.

Happy New Year.

Write to Al Root at allen.root@dowjones.com