Demographics Are Powerful, But....
February 10, 2010
Entering 2010, we expected this year to test our short-term nerves on the upside and the down. So far we have been well prepared and not disappointed.
We have stayed true to our valuation disciplines and that has kept us out of trouble. Although we still believe markets will continue to choppily climb to new highs by April, we strongly advise investors stay away from the hot stocks and sectors, and instead concentrate on good value.
In plain English we mean stick to buying new exciting growth companies with price to sales ratios of 0.75 and below. The chart below shows an example of this value added year to date.
The chart shows two companies which we like from a generational demand point of view. However, at the start of the year investors were paying 50 cents for a dollar of LaCrosse's (P/S, 0.5) revenue versus just over $4.00 for Apple's (P/S, 4.0).
It is not surprising that year to date LaCrosse (BOOT) is up just over 18 percent versus a near eight percent decline for Apple. So demographics is a powerful force, provided the valuation supports it.
Growing demographics alone cannot prevent an over-believed stock that is selling on sky high valuations from crashing back to earth. Nokia, which sold on a P/S ratio of 29.0, would be a good example of this is in 2000.
