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Picking the Top

Sigma Investment Counselors

April 28, 2016

It is fairly well established that no one has been able to consistently pick market tops and bottoms.  Of course, that is not stopping people from trying.  One anecdotal clue, that has some currency in the investment community, is the concept of cyclical companies announcing headquarters upgrades and expansions at or near the top of the cycle.

There may be some logic to this as major investments are unlikely to occur when sales and earnings are heading south, with no end in sight.

Like all anecdotal evidence, it’s not foolproof and should not be construed as a sell recommendation, but rather, a suggestion that investors revisit their assumptions and take a new look at the merit of existing or proposed commitments.

For example, Ford recently announced a proposed major transformation of its Dearborn facilities into a modern, green and high-tech campus.  Conceptually, this makes a lot of sense and is likely to be beneficial over the long term.  However, the auto industry is generally considered to be highly cyclical, so why now?

Over the last several years, the domestic auto industry has benefitted from a strong tailwind with several major positive factors, including; two tier wages, an aging fleet, cheap gasoline and exceptionally low interest rates.  For auto companies, this is about as good as it gets.

None of the above is intended to suggest that auto stocks should be sold or commitments deferred.  However, it may be a good time for investors to take a fresh look at their portfolio strategy.

All comments and suggestions are welcome.

Walter Kirchberger, CFA®

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