The power of time

Here's a stock that was beaten down that has recovered nicely in the last few quarters.

Author

Lou Whiteman
July 26, 2024

We talk a lot around here about the value in playing a different game.

Wall Street and the talking heads on CNBC are focused on the quarter. Or the next few quarters. They get paid to tell you what happens next. Not how the story ends. Their price targets are for one year out. Not the long-term value creation possible.

They upgrade and downgrade based on the most likely path for the next few months. Not on the long-term potential of a company.

We don’t have to be hemmed in by the next few months. We have the ability to think well beyond the current business cycle. It is the reason we can beat the pros.

Last October, when reflecting on some of those calls from the pros, I wrote:

The market isn’t wrong. The world is getting much more difficult for these companies. There will be losers. And there will be pain even among the survivors.

And yet… as I screen for potential investments these days, these same companies are the ones that jump off the screen at me. Yes, they are dangerous. There could be a zero here if things don’t go well. But in an environment where there are few bargains to be had, the bargains I see are bargains for a reason.

I don’t provide stock advice here. I don’t tell you what to buy. If you want some ideas from me on what to buy, there is a Savvy Trader portfolio of unloved, bruised stocks with potential to turn into something that you can check out.

But it might be interesting to look at an example in hindsight.

I’m pretty sure I wasn’t referring to Live Oak Bancshares when I wrote those words last October, but I was certainly thinking a lot about Live Oak in 2023. And buying Live Oak shares. Especially earlier in the year. Live Oak is a wonderful little small-business focused bank with just one location in Wilmington, N.C., and a national online footprint. (Disclosure: I’ve visited Live Oak, I’ve chatted with management in the past, and Live Oak was and continues to be a significant holding. Which, for the record, doesn’t mean you should buy it today or ever.)

In early 2023, interest rates were jumping and (poorly run) banks were failing. There was some panic selling, but also good, rational calls predicting tough times up ahead for banks. Live Oak lost more than 40% of its value between mid-February and the end of May.

In hindsight that was obviously an overreaction. But certainly, business was tougher for Live Oak in 2023 than it was in 2021 or 2022. The company had some less amazing earnings. The stock was downgraded and price targets were cut. Wall Street analysts, focused as they should be on the quarters ahead, were accurately assessing the current climate for banks like Live Oak. They were doing their jobs.

But that didn’t mean we who are more interested in time periods much longer than the next few quarters needed to listen to them. They weren’t talking to us, and we would have been wrong to listen to them.

You know where this story is going: Live Oak announced a strong quarter this week. The stock has more than doubled from its May 2023 low and is up something like 65% since I wrote those words back in October. There have been a lot of price target boosts and positive analyst calls along the way.

To be clear, they don’t all go like this. And certainly not this quickly. For one, it is best you stick with quality companies you are reasonably sure can ride out the storm. And even with quality, there is no guarantee that the storm won’t be so severe that it is able to capsize even the most stable vessel.

But it is also true that there are opportunities like this out there all the time. Something is always out of favor, and often for good (short-term) reasons. The two stocks I believe I was thinking of when I wrote those words back in October are both up from there, but both are still surrounded by significant near-term doubts. Obviously, I could still end up being wrong on them. But I added to my position in one just the other day.

The lesson here is to weed out the noise. Understand that the people paid to do this for a living are not talking to you, the long-term investor. Therefore, you don’t need to listen to them.

Your advantage is your time horizon. Don’t forget that.

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