If you remember the 1970's disco era then you might recall "This Bud's for You," an advertising campaign for Budweiser beer. This American icon has since been sold to a Belgium-based brewer and the commercial retired. While this "Bud" may still be for you--personally I think the stuff tastes awful, but I'm kind of a beer snob--I'd be careful about imbibing the common stock of the parent company AB InBev. The beer may have lots of fizz, but the common stock could leave an investor feeling flat. Why's that? I'm glad you asked.
It might be traceable to individual investors. Or perhaps institutional investors. You know, the professionals who should know better. Or both. Here's how I see it. The market has levitated itself higher over the past few years and currently resides at all-time high levels. In Pavlovian fashion, the always-dependable individual investor--often dependably wrong on timing--has decided it's time to jump into the pool-the stock market. So, stock market mutual funds have been receiving their strongest inflows in years.
Now here's where it gets interesting. It's likely that individuals are now comfortable going back into the pool, but don't want to jump into the deep end. Instead, they prefer to enter the shallow end, walking down the stairs and holding onto the railing. While wearing a flotation device. So, it's possible investors have been buying "conservative-sounding" funds that focus on large, stable, consumer-oriented companies such as food and drinks. Or, perhaps investors have left it up to the professional money managers to decide where to invest the recent inflows.
The fund managers, always mindful of risk, above all their own career risk, might decide it's better to be safe than sorry. Risk aversion could lead to investing the current inflows in Budweiser, McDonald's, Nestle, Diageo (Guinness, Captain Morgan rum, etc.) or Yum Brands (KFC, Taco Bell, Pizza Hut). Can't go wrong here, right?
Wrong. The psychological scars from 2 massive market declines in the past 12 years have perhaps pushed investors into safer companies, raising their stock valuations. The irony is that a collection of fairly safe COMPANIES could turn out to be mediocre or even risky INVESTMENTS, as the company valuations are currently elevated, in our view.
We constantly remind ourselves and our clients that it's important to separate business performance from common stock investment performance. A great company selling at a nosebleed valuation can be a lousy investment. So while promotion may be necessary and desirable when it comes to selling beer, it's not a recipe for stock market success.