Entry prices to hunt for the bottom in the stock market

The list of prices to hunt for the stock market bottom

March 2020. The Ibex index breaking below 7,000 points, half of Europe in lockdown, and oil prices plummeting without a safety net. In this environment, someone published six entry prices — Renault at 19 euros, Meliá at 3.70, IAG at 3.90, Occidental Petroleum at 9 dollars, Carnival at 15, and Las Vegas Sands watched at 25 — and announced they intended to invest their entire capital. Not a portion: all of it. Selling assets if necessary, and even borrowing if the S&P 500 fell below 2,500 points.

The bet had a thesis. The health crisis was the purifying fire that would return the stock market to reasonable prices after years of unfounded rallies. And with it, the opportunity to collect dividends for a decade of recovery. The first reaction was one of caution: too soon.

What prices were set and why

The numbers were not random. Renault at 19 euros, the argument went, was capitalized below its own cash value, with 43% of Nissan still not factored in. The argument was blunt: a company cannot be worth less than the cash it holds. IAG at 3.90 — executed at 3.95 — was a bet on the rebound of air transport. Carnival at 15 and Las Vegas Sands at 25 played the same card: cyclical businesses in cruises, hospitality, and gaming, crushed by the global shutdown.

The list included a panic threshold: if the S&P 500 dropped below 2,500 points, it was time to increase holdings in Enbridge and Geo Group "at ridiculous prices." The initial consensus was different: this is just the beginning, give it two more weeks.

Renault, the lab for everything that can go wrong

The French automaker became the case study. Entry at 19 euros with a previous average price of 23 and 6,000 euros in the first tranche. The reasoning seemed solid: the French state would not let its industrial symbol collapse.

The objection came with precedents. Bailouts are not the same as protecting shareholders. In Spain, Bankia, Abengoa, and Popular left investors with total or near-total losses. In the United States, the bailout of General Motors also did not save shareholders. The public umbrella supports the company; the shareholder is left out.

The drip of bad news confirmed the pattern. Renault requested up to 5 billion euros in state-backed loans and a 90% drop was expected in April. Daimler requested 12 billion. The entire sector was financing itself with public guarantees.

Dividends: religion for some, a tax trap for others

With 5,000 or 10,000 euros in hand, half the conversation turned to the old question: Enagás or Red Eléctrica? The comparative numbers were clear. For those defending Enagás, it paid out 1.56 euros gross per share compared to Red Eléctrica's 1.04, with more room for recovery and some international business versus a purely domestic monopoly.

The optimistic calculation assured that 10,000 euros well-placed yielded between 400 and 500 euros net per year in dividends, in addition to the psychological effect of reaping what was sown. The counter-argument was swift: with those amounts, the dividend wouldn't even cover snacks, and its taxation was worse than that of a fund, which allows for deferred taxes. The natural choice, they insisted, was a growing and reinvesting company, not one that distributes profits.

Capital increases, the enemy nobody saw coming

Midway through, a blow that many hadn't seen coming arrived. ArcelorMittal raised capital by 1.85 billion, about 20% of a market capitalization of 10.5 billion, catching those who had entered weeks earlier off guard. The conversion terms weren't even detailed.

The lesson spread quickly: in a crisis like this, capital increases are common, and minority shareholders end up footing the bill. The filter that was repeated was simple: look for companies with no debt and net cash, even if it's difficult with zero interest rates and in large, cyclical businesses. The warning was confirmed when S&P maintained IAG's rating at BB, junk bond, with a negative outlook.

Commissions and the cost of waiting in cash

The trading aspect also had its practical chapter. To enter with 6,000 euros, the commission range per trade was around 10 euros on low-cost platforms. The problem wasn't buying: it was waiting. Holding cash parked with an international broker like Interactive Brokers cost 1.5% annually on a tiered fee account. Paying to not invest, essentially.

The alternative that prevailed among the more cautious was simple: keep only what you plan to deploy in days or weeks in the broker account and leave the rest elsewhere. An operational detail, yes, but one that, in the midst of a roller coaster, makes the difference between waiting with room to maneuver or waiting with a noose around your neck.

The rebound that arrived without the real economy

The macro context was driving everything. The Federal Reserve was injecting unprecedented liquidity, the US Congress approved a 2 trillion dollar package, and indices rebounded strongly. On March 13 and 17, with the epidemic already out of control in Italy and Spain, the S&P rose by up to 10%. Those who thought they saw recovery were mistaken: the Ibex did not exceed 7,200 points, stalled at 7,120, and fell again to 6,900.

Subsequent data mixed euphoria and hangover. Carnival reached 18.64 dollars, a rise of 34.88%. Costa Cruises announced the gradual resumption of operations on September 6. PSA and FCA had to renegotiate their merger, and Daimler agreed to pay 1.9 billion in the US for dieselgate. Meanwhile, the narrative of the real economy remained one of temporary layoffs (ERTE) and dismissals.

Therein lay the contradiction that no one resolved: the stock market was rising on printed money while the economy was collapsing with people at home, unemployed. The debate on whether to buy, average down, or wait remains open. With the printing presses running, how much of that rebound was recovery and how much was simple asset inflation?