We’re now officially through the first quarter, but I for one am not breathing a sigh of relief.
During Q1, the Dow Jones Industrial Average gained 4.6% to close at 20,663.22, its sixth straight quarterly gain. The S&P 500 jumped 5.5% to 2,362.72 and the Nasdaq Composite Index, powered by tech giants, climbed a robust 9.8% to 5,911.74, its best quarterly performance since 2013.
But this market isn’t driven by individual stocks. Far from it.
Right now, most investors are following a painfully ignorant investing “strategy” that will leave them the most exposed and least hedged at the moment when stocks are most overvalued and vulnerable to a correction.
Here’s how not to make their mistake – and what to do instead.
It always amazes me how long it takes dying businesses to finally give up the ghost. And how long it takes shareholders to admit that they are going to lose every last dollar if they don’t bail out before the stock loses all of its value. We are seeing that in the retail space today as one dying brand after another bites the dust, and we are going to see it in the consumer space as well. Nostalgia is bittersweet, but investing in nostalgia is just bitter.
A sure sign that a company is in serious trouble is when it announces a restructuring plan. (See my article on TGT a few weeks ago.) An even more ominous sign is when it puffs up its chest and claims that its restructuring plan is actually something more grand rather than merely another tired attempt to fix a broken business model.
The company I’m writing about today chose the latter route by calling its desperate attempt to save itself a “Transformation Plan.” But in this stock’s case, it did more than restructure itself – it sold off its North American business (keeping a minority 19.9% position) and decided to tie its fate to the emerging markets, which have been giving it all kinds of currency and tax fits for years, and to one of the most tough-minded hedge funds in the world.
This company is no longer the master of its own fate. It now works for Cerberus Capital Management, LLC (Cerberus) and is effectively a private equity portfolio company masquerading as a public company.
As you’re about to see, that’s a huge red disaster flag (and a good short opportunity)…