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Last week was what appeared to be the season finale of the 2nd season of Wall St. Warriors. Many of you will remember the first season as launching Timothy Sykes into a media personality after the episode focusing on him trading in his bathrobe while his mother cleaned his NYC apartment. Although not the image most people have of hedge fund managers, it was nevertheless a memorable character.
In Season 2, the most interesting characters were Lance and James who are brokers at an unnamed (but obviously not top tier) firm and appear to be straight out of The Boiler Room cast. What I found most interesting about them (other than their obvious over the top sales strategy) was what they were doing with their clients money. They appeared to be primarily using fundamentals to select their stocks and their #1 stock (they said they had 60-70% of all client money in it) was SNDK. Sandisk has a great story and has had good growth in the past. It is by no means a pump and dump penny stock (like those in Boiler Room) or one set to go to zero.
However, the one thing that Lance and James never paid attention to is the overall market tone. In the time the show was filmed (appeared to be June/July -> Dec), the US stock market transitioned from a Bull market to a Bear one and experienced it’s worse decline since 2002. In these types markets, the market will simply not pay the same multiples for stocks as it will in a Bull market. With contracting PE multiples, even if a companies earnings growth stays constant (difficult to do in a recession), the price will still go down. The opposite happens at the start of Bull markets. Even companies with marginal growth go up because their earnings multiple are expanding. Long story short, you can be right about the company and still lose large amounts of money because of market conditions. Just something to remember when you’re allocating your portfolio.
- John