Seven years a bull


It was a near-run thing. A cursory glance at the S&P-500 at the beginning and end of 2015 could easily lead one to conclude that the index had fallen for the year. Not so. If one adds in the dividends paid by S&P-500 stocks (or examines the cost-adjusted values, which is functionally the same thing), one sees that in fact, the index closed the year higher than it began. Of course, this was cold comfort to many, particularly those who had gotten used to easy wins and high dividends in the energy sector.

Nevertheless, the bull market did, technically, survive, and that raises the question, “What kind of stocks are likely to do well in a very mature bull market?” and, with a finer point, “Which stocks should I now be in?”

Today, we are going to look at the lessons of the past: what does history tell us about the way things evolve in a late-stage bull market? And which of the stocks on the market today appear most likely to follow the same pattern as the winners of yesteryear? As always, be sure to consider these ideas to be just that, ideas, and do your own research before investing.

What happens in a downturn

By at least one measure, the stock market decline of 2000 was the worst in living memory: it lasted the longest. On a cost adjusted basis, the S&P-500 began to fall in mid-2000, and the index didn’t regain all the lost ground for almost thirteen years. Even so, the middle years of the decade weren’t so bad for companies that were just starting out—it was largely incorrect prices that the market was responding too, not economic weakness. The decline of 2008 was different in that stocks weren’t that overvalued to begin with, but the sudden debt crisis threw the earnings potential of every company into doubt.

And neither decline was anything like the Black Monday stock market “crash” of 1987. Given the far more severe downturns we have since lived through, it is easy to forget what a shock 1987 was. Confidence in financial markets was badly shaken, and with good reason. Programmatic trading—something many people didn’t even yet know existed—nearly wiped out the nation’s wealth in a single stroke.

The point is that a correction is very different from a panic, a panic very different from a debt crisis, all three are different from an economic recession, and we don’t know know which of these, if any, will trigger the end of this bull market.

So what’s an investor to do?

OK, obviously, we need to look for value, but how so? What sort?

Well today we are going to look for stocks that have a somewhat magic combination of steadily rising revenue and steadily rising earnings. We’ll be looking at a valuation that you don’t hear about nearly as often as P/E, that being P/B, or price to book. You can get some idea of how good a value a stock is by looking at the multiple of its price to its book value, which is assets minus liabilities.

It turns out that, given modestly restrictive numbers, there aren’t a lot of stocks that meet all these criteria; in fact, there are exactly four. That’s good, of course, because the restrictions wouldn’t mean much if every other stock could meet them. I take it as another good sign that these four stocks are in completely different market sectors. So which are these (perhaps) downturn proof stocks? I can only hope you find the answers as surprising as I did.

OK, first stock…

Korn/Ferry (KFY)

Korn/Ferry is recruitment agency, which is something like an employment agency in reverse. When companies need talent from outside for specific and challenging roles (sometimes even the role of CEO), they call Korn/Ferry, and Korn/Ferry makes it happen. The company has a very low P/B of just 1.68 and no debt. Revenue has been rising for five years and earnings for three, but it is this year’s projected earnings growth of 18% that makes KFY shares look powerfully undervalued. There are very few occasions on which you can actually catch the market sleeping, but this could be one of them.


GoPro (GPRO)

Objective criteria are fun, in that they always tend to point in ways subjective judgement would not. Despite the fact that I own a few shares myself, I thought I remembered GoPro being in earnings decline. In this case, GoPro snuck past my criteria on a technicality: despite the company’s earnings per share having fallen dramatically from $0.92 in 2014 to $0.25 in 2015, the company still registers as having exceptionally strong three-year earnings growth, as it only made $0.07 per share in 2012.

Still, after the recent history of GoPro, could GPRO stock really be considered a value?

It is important to remember that from a value perspective, it makes no difference whether GPRO shares traded last summer for $90, $9, or nine cents. The company still has very positive revenue momentum, no debt, and a low P/B of 2.2.



Pundits and politicians are awfully worried about a looming US recession, which makes it easy to overlook cyclicals at present. We’re going to look beyond those headlines, though, to the actual economic numbers which suggest no such thing.

PACCAR’s story is almost too simple. They make trucks, they make parts for trucks, and they provide financing for their trucks. There’s some debt here, but the company’s revenue and earnings have both grown every year since the 2008 crash, and there are very few companies that can claim as much. Also, the P/B is a low 2.65.


Signature Bank (SBNY)

With its market cap of $10 billion, Signature Bank, headquartered in New York, is a bit big to be considered a regional bank, but still far too small to join the ranks of the giants. The candy apple here is the bank’s five-year earnings-growth rate of 34.6%. That’s an apple worth bobbing for. You might expect a company growing at that rate to have a P/E in the 30 to 35 range, but here the forward P/E is just 14.5, and the P/B is 2.48.

At $137.50, SBNY shares are just a good old-fashioned bargain.






Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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