by doug gerlach president, iclubcentral inc. july 2020 · title: microsoft powerpoint -...

© Copyright ICLUBcentral Inc., 2020

AAII/BetterInvesting Metro DC Chapter Presentationwith Doug Gerlach, ICLUBcentral Inc.

By Doug GerlachPresident, ICLUBcentral Inc.

July 2020

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Find stocks of well-managed companies with good track records & good prospects of future growth, then buy at reasonable prices.

Hold in diversified, concentrated portfolio until circumstances suggest replacement or until better candidate is found.◦ Target holding period is 5+ years, through market & economic cycles.

Total return comes from capital appreciation, dividends, & P/E ratio expansion.

Individual stock selection can be tailored to each investor’s risk tolerance & other preferences.

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Long-term focus means short-term market gyrations are of little concern (except as buying opportunities).

Market corrections & bear markets are seen as buying opportunities.◦ If, at end of investment period, you end up with same gains as if you

bought & sold at various points along the way, buy-and-hold is better approach.◦ Big advantage of long-term approach is no risk of getting signals wrong

in strategy, buying too late or selling too soon. With long-term focus, don’t have to worry about exit points

or profit-taking or “paper” losses.

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Actively monitor fundamentals of all companies & regularly replace companies with lagging growth or uncertain future.

Weed the garden regularly – but don’t cut off the blooms. Don’t set price targets – let winners run. Use TSLOs on case-by-case basis when market appears to

have run up valuation & you’re concerned about sudden u-turn in price.

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Bear markets & recessions are common, & successful investors learn to navigate them.

Each recession & bear market is different, & caused by slightly different factors.

However, we can look back at history to understand possible causes, courses of action, & lengths of these events.

Unfortunately, we have less experience with pandemics.◦ “Spanish flu” of 1918 was last widespread epidemic in US.

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Pandemic DateGlobal Deaths

(Est.)

U.S. Deaths(Est.)

Mortality Rate Notes

Spanish Flu 1918-19 20-50 million 500,000 2.5% • Infected 1/3 of world population.

H2N2 Virus (Asian Flu) 1957-58 1.1 million 116,000 0.5% • US GDP fell 8% in Q1 1958.

H3N2 Virus (Hong Kong Flu) 1968 1.0 million 100,000 0.5% • 500,000 deaths in Hong Kong (15% of population).

COVID-19 VirusTo date 1 Jan-16 July 2020 2020 600,039 142,065 3.7%

(US)• Globally, mortality rate is 4.2%, based on tested cases.

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Estimates of COVID-19 cases & deaths range widely & depend on increased containment efforts, but mortality rates point to widespread

impact.



Swine Flu (1976). Russian Flu (1977). HIV (1981). Crash of ’87 (1987). Avian Flu (1997). SARS (2003). Avian Flu (2006). Swine Flu (2009). 9/11 (2001).

Gulf War (1990). Zika (2016). Ebola (2018). Financial Crisis (2007).

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Markets will survive COVID-19 as well.

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S&P 500

EAFE

S&P SmallCap

600

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Reaches all-time high 2/20/20

Bear starts 3/12/20

Reaches bottom 3/23/20, down 32.2% from high

Bear ends 6/5/20

Up 40.8% from bottom

Ends 2019 up 29%



13Source: www.multpl.com, using estimated TTM EPS

07-16-2020

For much of market history, P/Es above 20 were uncommon.

Market valuation showing strength

in face of EPS degradation.

14Source: www.multpl.com, using estimated TTM EPS

07-16-2020

EPS declined

from peak after first impact of COVID-19

in Q1.



Interest rates are, low & likely to remain low. TINA & FOMO still in place. Federal stimulus has helped, & another round is

expected. Hopes for COVID-19 vaccine/anti-viral treatment are

high.◦ Morningstar analyst this week projects multiple approved

vaccines by early 2021 & wide vaccination in developed markets by mid 2021.

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17Source: TradingEconomics.com | US Bureau of Economic Analysis

US Unemployment Rate Since 2010

(Concerns exist about accuracy of recently-reported

figures.)

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While only 1 quarter of negative GDP has been

recorded, it’s acknowledged that

recession is underway.

US Quarterly GDP % Change Since 1995

Source: TradingEconomics.com | US Bureau of Economic Analysis



Economists have identified several models for ways that economies recover from recessions:

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The V-Shaped Recovery is commonly invoked, but has increasingly come under fire in favor of U- or L-Shaped Recoveries.

Economic expansions have gotten longer in recent decades, with less frequent recessions.

Most recessions resolve in 3-6 quarters (in recent history). Particulars of current recession lead to expectation that

recovery may be at longer end of recent average length. Some regions of U.S. may recover more quickly, others may

take longer.

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From a survey of 341 investors in late June….

Many companies have been severely affected by pandemic-induced recession & will see losses and/or enter into bankruptcy.

Some companies/industries many not recover for several years.

Holding these stocks may not be prudent.◦ Even if company is well-run & inexpensive to buy, it may take

too long for purchase to be rewarded.

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25Source: Factset July 2, 2020

Since beginning of Q2, analysts have reduced estimates of S&P 500

EPS by 37.0%, biggest drop in 5 years.

26Source: Factset July 17, 2020

Since beginning of Q2, analysts have reduced estimates of S&P 500

EPS by 37.0%, biggest drop in 5 years.



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Source: Factset July 13, 2020

Traditional defensive sectors are still expected

to perform well.

Individual companies in various sectors may outperform sector

averages.

Our approach focuses on long-term potential for our individual stock picks.◦ 5 years from now, any recession or bear market will have

concluded.◦ New highs will then be reached.

Still, we prefer not to sit on underperformers or laggards if better opportunity can be found.

Current market/economic climate suggests paying closer attention to near- & mid-term factors.

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What is likely effect of recession & COVID-19 on company’s fundamentals?◦ Consider positive & negative factors.◦ Try to quantify expected performance over next 2 fiscal years (use

analysts estimates & company guidance).◦ Don’t downplay the downside.

How long until EPS return to 2019 levels? Quick check: review analysts FY 2021 estimates at Yahoo!

Finance or Nasdaq.com.◦ If that number is below FY 2019 EPS, road to recovery for stock may

be too long.

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What is long-term & near-term prognosis for any stock you are thinking about buying?◦ Waiting too long for expected recovery may be frustrating &

reduce overall returns.◦ However, stocks in troubled sectors & industries may be deeply

discounted, but don’t be overly attracted to highest total return candidates (they may be distressed).

Excess valuations of many large-caps will reduce future returns.◦ Use of TSLO might be prudent if sitting on unrealized gains.

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MI

D-

TE

RM

R

IS

K

M I D - T E R M R E W A R D

UTILITIES

TRAVEL,ENTERTAINMENT

HEALTHCARE,CONSUMER DEFENSIVE

BIG TECH,FINANCIALS

RVs,HOMEBUILDING

SPECIALTYRETAIL,AUTOS

CYCLICAL

WILD CARDS:Energy,

Industrial/Office REITs, Basic

Materials, Manufacturing

FINANCIALLY-SOUND

LARGE CAPS



Does your portfolio include enough defensive stocks?◦ Stocks in Utilities, Consumer Defensive (Consumer Staples), Healthcare sectors.◦ Many of these stocks may already be highly valued as investors have flocked to them during times of crisis.

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Are you chasing “quick returns” in your portfolio by looking for companies that will profit from pandemic?

Some investors are loading up on biotech & pharmaceuticals who are developing vaccines or anti-viral treatments, or make PPE, or make remote access/cloud software products.

These stocks may not have much upside left. At this stage, it’s impossible to tell what companies will

develop successful vaccines & treatments, so many of these stocks remain speculative.

Don’t invest on “gut feelings.” Do your research.

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Are you relying on “traditional wisdom” or “personal experience” to drive investing decisions?

Nature of this pandemic & investors’ unfamiliarity is causing some investors to make moves that may not be supportable over mid- and long-term.◦ Zoom’s P/E is currently 1,458.◦ MMM’s P/E is currently 18.7, but 5-year consensus EPS growth is 1.8% &

yield s 3.6%.◦ MRNA has never made profit, so downside is huge if vaccine test isn’t

successful. Look at hard facts & real news.

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RV sales are strong. Entry-level new home sales are good. Home improvement stores are performing well. Insurers are benefiting from delay in elective procedures. Counter-intuitive/contrarian thinking might uncover

opportunities.

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What does the “new normal” look like for companies, industries, economy?

Longer-term, massive changes are likely in many cases. Will companies embrace work-from-home as permanent

shift? Keep eye on trends & shifts in consumer behavior.

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TICKER COMPANY NAME7/16/20

PRICE P/E% ANNL TOT RET BUY BLW SELL ABV YLD

AMN AMN Healthcare Services 47.40 19.2 17.5 56 89BSTC BioSpecifics Technologies 66.41 19.9 13.5 64 105CCS Century Communities 33.51 8.8 18.4 35 64CVGW Calavo Growers 60.45 91.6 20.1 74 119DOC Physicians Realty 17.40 16.5 17.0 17 26 5.3%EGRX Eagle Pharmaceuticals 51.28 n/a 20.5 58 106ESNT Essent Group 34.75 5.9 20.0 39 67 0.4%FSS Federal Signal Corp 29.89 16.1 15.3 33 50 1.1%JBT John Bean Technologies 85.25 19.8 13.6 85 133 0.5%ORCC Owl Rock Capital 12.61 64.7 19.2 13 19 9.8%

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TICKER COMPANY NAME7/16/20

PRICE P/E% ANNL TOT RET BUY BLW SELL ABV YLD

CBOE Cboe Global Mkts. 90.19 21.4 17.0 101 126 1.6%

ESNT Essent Group Ltd. 35.21 7.0 19.9 37 52 1.8%

ENSG Ensign Group 44.91 17.0 20.5 44 74 0.4%

FIVE Five Below, Inc. 102.63 27.7 23.7 102 148

ULTA Ulta Beauty, Inc. 203.81 16.4 24.4 238 335

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by doug gerlach president, iclubcentral inc. july 2020 · title: microsoft powerpoint -...

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