The Lake is Full! The Lake is Full!

Bill Parrott |

This past weekend my wife and I tried to eat dinner at two restaurants on Lake Travis.  Each restaurant has an amazing view of the lake.  The first restaurant is new to the area.  We couldn’t find a parking space after a few loops through the lot so we left and tried the second restaurant.  The second restaurant is an Austin institution with seating for thousands.  We weren’t the only ones who had this same idea.  Our wait time was going to be over an hour and a half long.   After an hour and a half, we gave up and had dinner at a little, family owned Mexican restaurant by our house.

Why were both restaurants so crowded?  The lake is full and it’s attracting all types to the area.  Real estate investors, new business owners and restaurant patrons all trying to cash in on the full lake.  The lake is beyond full, in fact, so the Lower Colorado River Authority has to open the flood gates to let some water out.

When the lake is full valuations and expectations rise.  My experience on Saturday was frustrating because I had high expectations and they weren’t met.   I also knew the food wasn’t worth the hour and a half wait.   I should’ve known better.

This hasn’t always been the case.  In 2014 the lake was 61 feet below its full level as Austin was in the middle of a major drought[i].   During the drought home values dropped, businesses closed and people stayed away from the lake.  When the lake was at its lowest levels, however, we were able to eat at the same mega-restaurant and enjoy a nice dinner.  There was ample parking and we never had to wait in line for a table.  My expectations were low and the restaurant exceeded them.

The cycle will repeat itself, of course.  When will it begin?  Who knows. I hope not for some time. It won’t be noticeable at first but the lake level will start to drop.  A foot here and a foot there and pretty soon we’re talking about a lot of water.  What of the people who buy homes and open new businesses when the lake is full?  Their investments will decline with the water level.  When is the best time to take advantage of lake activity?  The best time to buy and invest is when the lake is half full!

The stock market currently has a number of stocks that are “full.” These companies are trading at rich valuations and the expectations for these stocks won’t be met by investors buying them today.   

What stocks are currently trading at these high levels?   According to Morningstar there are 452 companies trading with a price to earnings ratio of 75 or higher.   A few names on this list include Amazon, Facebook, GE, Kinder Morgan, Netflix and Under Armour.

Stocks that are half full get little love.  Stocks in the bargain bin are discarded because they’re going through a rough patch.  It’s hard for investors to buy stocks when they’re out of favor.  Using the same Morningstar data there are 2,922 companies trading with a price earnings ratio of 15 or lower.   A few names on this list include American Express, Berkshire-Hathaway, Gilead Sciences and Walmart.

Valuations matter.  When stocks trade at a PE ratio of 15 or lower they had a 12 month return of 12.2%.  A PE ratio of 20 or higher generated returns of -.43%[ii]. 

When is the best time to buy a stock?   It’s when they’re half full.  When stocks sell off and “experts” have given up on them is the best time to add these companies to your account. 

Whether it be lake levels or stock prices pay attention to levels, valuations and expectations.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.

That same day Jesus went out of the house and sat by the lake ~ Matthew 13:1


[i] LCRA Website.

[ii] Monevator, Citi Research, Business Insider.