04 Oct Whirlpool Update & Market Thoughts
Whirlpool continues to decline substantially from where we originally purchased the stock ( -30%). At this point it has reduced the value of the portfolio by a little more than 1%. As a rule, this tends to be the threshold for any investment loss to impact the overall portfolio. Goldman Sachs reduced their target price for the stock to $107 this week (around 6% below today’s price of $114). In Whirlpool’s 2nd quarter conference call, the company targeted approximately $850 million in excess cash generation (free cash flow) for the year 2018 – an all-time record, and $14/share in earnings. At that level, the stock should be worth the value we paid. The company comes out with 3rd quarter earnings October 24th, of which I expect their target to be slashed if the stock price is any reflection. We will wait and hear what management has to say, but if they cannot predict their business any better than this, I certainly cannot.
We currently have numerous short term signals of an overheating market – mergers and acquisitions are at the highest level since 2007, non-profitable IPO’s (initial public offerings) highest since 2000, highest consumer confidence since 1999 , investor sentiment is near extremes and the list goes on. The market is also acting very unusual in that over 50% of all stocks on the NYSE are below their 6 month average and auto’s and homebuilders are hitting 12 month lows. Most of the indicators I mentioned are what we call lagging indicators – they are reflective of what has been happening, not what might happen going forward. No one knows where the stock market is headed, we do know that this is the longest economic expansion in history and at some point it will decline. There is no indication of that in the economic numbers today but the fact that two critical industries are at their 12 month lows is interesting. I have attached the September cover of Business Week acknowledging the length of this bull market and the September memo from Howard marks—one of the all-time best investors talking about investment cycles. I just wanted you to be aware of where we are in the current cycle, and as such I think it best to proceed with caution as Howard is advising.
Thank you again for your business and trust, I will keep you updated on the Whirlpool situation.