Time to Dive – Into Research
Posted: October 2008
As of this writing, the markets have tanked or are tanking (depending on whether you read WSJ or Barron’s), no one can get enough credit to buy an apple, and cash is again King. What is a retail investor do in such times?
Dive in! Well, not all the way in, but it certainly is time to have the swimsuit on and the beach towels ready because the pool of bargains may never be deeper or more welcoming.The DJIA is dancing with 8,000 and S&P pondering the possibility of going an absolute negative, the number of great companies with superior share prices may have never been greater than today.
Remember our history – market debacles like this one make rich people richer and average people poorer. The difference is that rich people buy cheap and hold while average people buy high and sell now – and don’t reinvest until prices are high again. Panic in the market creates opportunity and retail investors can profit immensely with relatively small buys if (oops, there’s that nasty “if” thing again) they do a little homework, construct an appropriate strategy and execute it diligently.
So what belongs in our strategy given the unprecedented level of madness, inanity and sheer stupidity reflected in this market sell off? A few macroeconomic pointers will help us swim the length of this pool profitably.
First, basic business will continue to do relatively well. The guys that sell stuff we need, sell stuff that business needs, and who pay dividends will be at the front of the recovery. There is a few hundred billion dollars (that’s correct – billion) of investable funds sitting on the pool edge today, held by pensions, hedge funds, private equity and a few notable personages like Buffett and Soros. What these luminaries are seeing is a market coming off ridiculously overpriced levels, blasting past a nominal reasonable value and sinking to depths way past cheap. In the next few months, these investment pros will slink back in, a pool toy here and a life preserver there, until they’ve started pushing prices back to the surface and confidence back into the market.
Second, price recovery will be uneven as it always is after panic subsides. Banks and the financial sector in general will continue to evoke scorn and hatred long after the Fulds of their world have been imprisoned. Their books will continue to be suspect, their public pronouncements ridiculed and their overall equity prices below proper valuation for years, if not decades. As rationality returns, however, institutional buyers will see that good companies, run well for many years and still doing what they’ve always done, really are good companies. They will buy accordingly, which favors large cap and larger mid cap organizations.
Third, dividends are more important than ever. The market as a whole will be close to flatlined for some time – possibly years. The role of mutual funds as retirement tools for millions mitigates that sense somewhat, suggesting the type of no-growth period between 1966 and 1982 is unlikely to be repeated. Moreover, the sheer volume of dollars held by institutional investors now, compared to then, makes even thinking of such a period difficult. Capital has to go somewhere; there is virtually no where for it to go; ergo, it will reenter the market relatively soon.
To get any kind of assurance of return, that capital will move first toward dividend paying equities and, to a lesser degree, high tech and pharmaceutical plays which offer unusually high upside if they hit. Retail investors like us can’t afford the risk on the upside and need to stick to preserving capital with some assurances of return – which means dividends.
Finally, none of the trends and tendencies in the market are likely to swim up to you from the bottom unaided. Do your homework; research is the guiding principle before diving in with your money. The market will, most likely, wander pretty aimlessly between now and year end and suffer another mini-blowout in December. Remember that Uncle Sam treats capital losses with a fair eye and many (if not most) institutional traders are going to sell off losers that month to mitigate taxes due or earn tax loss carry-forward positions for 2009. For us, that means to be wary and use our time between now and then to decide where we should land and how far we should go in January. For those of us with 401k or IRA contributions to be made this year, the later in December we can drop that money, the better.
What does that leave us with? Well, first think trash (one of Peter Lynch’s favorites), as in Waste Management (NYSE:WMI). Trading around $25 with a pleasant little forward dividend yield of 4.2%, they’re a little light on cash and suffering from some bidding wars in the industry. A significant piece of their future, however, are value added services in industrial cost reduction initiatives with their comprehensive waste management systems, an increasingly attractive offering to their embattled manufacturing customers.
Another area to look, for example, is where no one else looks. SPX Corporation (NYSE:SPW), the best run company no one knows about, is trading just short of $50, has an absolute boatload of cash on hand and even better cash flow despite two of their four divisions being tied to sectors with issues (construction and automotive). Given a forward dividend yield of 2% and a share price barely one-third of their high, a healthy rebound here is certainly likely.
Stalwart companies are always interesting after downturns. 3M (NYSE:MMM), Allstate (NYSE:ALL), and Stryker (NYSE:SYK), leaders in their respective sectors, are flush with cash, offer nice dividends and lead their areas with products largely immune to financial and economic downturns. Mine Safety Appliances (NYSE:MSA), with a 3.7% forward dividend yield and a sector enjoying growth with increased spending on mineral extraction and increasing governmental focus on mine safety globally, is another intriguing opportunity trading at $26, less than half their high for the year.
Aging people don’t go away in economic downturns (in fact, many of us get there quicker!), so long term care facilities are interesting. National Healthcare Corporation (AMEX:NHC) and their forward dividend yield of 2.2%, healthy cash balance and practically non-existent debt deserves some attention trading in the mid $40 range as does their much larger competitor Amedisys (NASDAQ:AMED), also trading in the mid $40’s, but with more debt, less cash and no dividend.
These last two show why your research is critical. In every respect, NHC and Amed appear to be equal candidates for retail investment. AMED, however, has issues with debt (and in a period of frozen credit markets, that is an issue) and, despite impressive growth, has little cash on hand and an unimpressive ROE. In troubled times, cash is king, ROE is what we want, and dividends make it worthwhile.
Retail investors can not afford fear in their lives. Remember, again, our
history – 70% of the gains in every market upswing happen in the first 12%
of the market turn. If we aren’t in the market when the move starts, we
won’t make our modest fortune from it. Now is our chance to do our research,
refine our investment philosophies, find our good companies with humbled
prices and prepare ourselves both emotionally and financially to dive in.
(Disclosure Notice: Unicorn Equity Analysts and/or the author(s) of this
article hold a nominal position with fewer than 100 shares in SPW and WMI,
and hold has no holdings in any other equity mentioned in this article.)
