A strong January has lifted many stocks that are just riding the market&s;s coattails. Since there are significant market risks, I have been looking for companies that have such strong fundamentals that they can move up even in a down market. Wayne Himelsein, one of my managers, says PayPal fits the bill.
&l;strong&g;Ken Kam&l;/strong&g;: Would you agree that when the market is advancing, it is tougher to spot the true winners?
&l;strong&g;Wayne Himelsein&l;/strong&g;: That&a;rsquo;s right; when the great majority of stocks looks good, it can be quite a bit more difficult to spot those that are doing so on their own merit.
The market has an amazing way of carrying all its constituents along with it. And for good reason. Good broad economic news trickles through to everyone. If the Fed doesn&a;rsquo;t raise rates, all of corporate America gets cheaper money, so all profits benefit. Makes perfect sense.
But we cannot fall for this trap when stock picking. We still have to find the differentiating drivers, for those are the ones that will often hold up better when the markets pull back, or better yet, advance far past the market as it climbs. That&a;rsquo;s what we all really want.
&l;strong&g;Kam&l;/strong&g;: That is exactly what we all want! And you say PayPal is one of those, I&a;rsquo;m eager to hear why?
&l;strong&g;Himelsein&l;/strong&g;: Perfect, because I&a;rsquo;m eager to share! My champion for today is PayPal, the literal mover of money is about to move our investing money.
PayPal has revealed its strength, from the get-go of its existence back in July 2015. From its launching pad in mid-2015, it accumulated energy through about April of 2017, going almost nowhere upward, but expressing the building of spring tension in the way it traveled.
It squeezed itself as it moved forward, pushing up against mildly rising tops with aggressively rising bottoms. That is, every time it moved toward its high points, it would pull back less and less, getting nowhere near its prior low levels. It&a;rsquo;s like that shrinking perspective room from Alice in Wonderland, where as you walk forward the space shrinks around you, except with Paypal, it was from the bottom pushing up. And then it popped, like wildfire, gaining 100% over the next 8 months, till January of 2018.
&l;strong&g;Kam&l;/strong&g;: That sounds great, but what about now, looking forward?
&l;strong&g;Himelsein&l;/strong&g;: Fair point. It is all history. But what that view does for us, is establish a behavior. It&a;rsquo;s like our kids. The outgoing dynamic child in 2nd grade versus the introverted quiet child in 6th grade, are highly likely to be exactly those personality traits leaping 30 years forward. More so, the dynamic 2nd grader will more likely be a CEO, and the introvert, an author. Not always, but the point stands that character and behavior often project forward, with kids, and with stocks.
And it is with that projective behavioral lens that I refer to PayPal&a;rsquo;s sideways choppy movement from January of 2018 through January of 2019. For that whole year, it has bounced, up and down, down and up, going almost nowhere, on average, albeit in style. And the style is both healthy and tension building.
&l;strong&g;Kam&l;/strong&g;: Interesting. So you are pointing to a repeat of its first build up and explosive run as if we are coming up upon round two?
&l;strong&g;Himelsein&l;/strong&g;: Precisely. That said, in the markets, round two is never quite like round one; it just can&a;rsquo;t be that easy. But there are certainly similarities, as well as nuances that equally shine. For example, the basing in the October-December market correction is, at every low point, higher than the basing in the February market correction. Not so for the market, but yes so for PayPal.
Also, if we slap a close up lens on the camera, and look just at the basing in October-December market correction, we see each and every low point higher than the prior one. Again, not so for the market, and concurrently, quite extraordinary to achieve when all around is falling apart. To be &a;ldquo;building&a;rdquo; when others are &a;ldquo;crumbling&a;rdquo; is a feature I love.
Finally, if we turn that lens up to the highest power, and look at just the recent week, we see an all-time high on January 25th. Obviously, not even close for the broader market which is still far below its all-time highs. But more importantly for Paypal, it may be the first leg of a break out of the year-long tension building in the spring. Pop goes the weasel.
&l;strong&g;Kam&l;/strong&g;: I see those things, and now appreciate the point you are making. It&a;rsquo;s quite a different setup but shares the overall behavior you describe. Is this what you meant by stand-alone strength?
&l;strong&g;Himelsein&l;/strong&g;: Exactly what I meant. While January has been an incredible month in the market in relation to all January&a;rsquo;s in history, and all months in all markets, PayPal is still standing out, both in its most recent achievements and more ironically, in just acting the same way it has in prior years. The fact that we seem to be at the tail end of a long time energy build up, with a pending pop in our midst, is coincidental to a wider blow-out January.
It certainly made it harder to see amongst all the green ticks, but not impossible. Excellence has a way of screaming.
&l;strong&g;My Take&l;/strong&g;:&a;nbsp;Although I am impressed with the market&s;s performance in January, I worry that we will see another bout of market weakness due to another government shutdown, another disappointment in the China trade war or another Brexit scare.
PayPal did well in January&s;s market. Wayne argues that the stock can do well even if the market doesn&s;t. This is exactly the kind of judgment call that is behind Wayne&s;s excellent long-term track record.
Wayne Himelsein&s;s Logica Focus Fund (LFF) has an 18+ year track record that extends through 2 market crashes, numerous corrections, and sector rotations. Over that period, Wayne&s;s model averaged 11.37% a year which compares well to the S&a;amp;P 500&s;s 5.57% return for the same period.
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