So for the past 24 months I’ve been simply jumping in and selling the market ahead of the selloffs, taking profits and hopping back out. It’s been a bit boring but a solid strategy nonetheless. However, I believe things are about to get more interesting. I fully expect a large event this summer to send stocks tumbling beyond the intermittent 15% plunges we’ve seen these past couple years.
From a political standpoint, the threat of a Trump presidency has got the neocons a bit on edge that their wars are coming to an end. Not ones to sit back and simply hope for the worst I suspect they get the ball rolling prior to November. From a financial risk standpoint, I see business defaults (along with individual) rising and this tells me that banks are now choosing to realize losses at current levels rather than accruing ever increasing unrealized losses by rolling loans over.
This is a very significant tell in lending that risk has made a sharp move higher. And where will this tightening show up first? Small Caps. Now looking at ^RUT you find it is still within single digit percentage points of its all time high. Given risk is moving sharply higher and growth is experiencing significant deterioration I have to conclude this means a material overvaluation.
So, I’m looking for specific stock overvaluations and these can come in one of two forms. Either risk is being underestimated or growth is being overestimated. Pretty simple stuff eh? Ok so, here’s the juice. After running a few screeners I found WDFC or WD-40 Company. We all love this product almost as much as duct tape. The problem with WDFC is not on the risk side but on the growth side. Now I could bore you with lots of fundamentals but when I did that to my old trading partner, he sent me back a much more interesting argument.
Orange line is Facebook and blue line is WD-40. Since the FB IPO, WDFC is only slightly off pace with market cap expansion