Posted on 03/09/2008 6:01:33 PM PDT by BenLurkin
You know that political bumper sticker that reads, "If you're not outraged, you're not paying attention"? It might as well apply to the market these days. Starting in November, stocks started dropping ... and they haven't recovered.
Good -- even great -- companies are being sold down to levels far below their true worth, and investors are losing their savings. It's outrageous!
A shocking and somewhat interesting statistic A whopping 79% of all stocks traded in the U.S. are down over the past four months. That's 5,339 names in the red. Another 3,032 of those names (fully 45%) are down 15% or more. And stocks such as Intel (Nasdaq: INTC), Verizon (NYSE: VZ), DISH Network (Nasdaq: DISH), and even Wrigley (NYSE: WWY) haven't returned a penny for the past three years.
So if you've lost money of late, don't feel bad. There has been no hiding from this downturn.
But let's also be honest: It hurts.
Time to panic sell It's outrageous and it hurts, but what's the individual investor to do? The market is a monolith at times, and it can be hard to sway.
Case in point: Barrett Business Services. I found this tiny West Coast professional employer organization and staffing company during my work as the micro-cap analyst for our Motley Fool Hidden Gems service. At the time, it was trading for a little more than $20 per share. I liked the CEO, I liked the balance sheet, I liked the track record, and I thought it looked cheap.
What's happened since? You guessed right: It's dropped about 25%.
What's your next move? See, the market has it in its head that the economy is worsening and the consumer is weakening. When fears are that broad, everybody gets punished.
Pain isn't reserved for companies that struggle to turn a profit, such as Wind River Systems (Nasdaq: WIND). Companies such as Fannie Mae (NYSE: FNM) that have seen their business fundamentally altered by the credit crunch are also hurting. The market has even stung "defensive" plays like Clorox (NYSE: CLX).
And while losing money can feel outrageous, the most outrageous part about all of this is that even great companies are getting caught up in the chaos. Some of this makes sense (the economy is getting worse, after all), but some of it does not (it won't be terrible forever).
But back to Barrett: It still has a strong balance sheet, it's buying back shares and buying up weakened competitors on the cheap, and it's paying shareholders a nice 2% dividend. Could the stock drop further from here? Of course, but I still think it's outrageously cheap.
And I'm not alone. CEO Bill Sherertz told analysts on the last conference call: "If you guys want to sell [the company] down to five times earnings, maybe I will just buy the whole [expletive] thing."
Enough [expletive] said After backing out cash on the balance sheet, Barrett today sells for just 7.0 times earnings. But that's not necessarily the point. It's suffering along with a few thousand more stocks on the market.
Investors, then, have two ways to express their outrage:
Withdraw money from the market and wait for current market conditions to subside. Put more money in the market and take advantage of current prices to build a portfolio of excellent companies on the cheap. We're all about the latter strategy at Hidden Gems, and we're excited because there are so many more buying opportunities today than there were last summer, when our returns were flying high. Fortunately, investing isn't about short-term returns; it's about making a fortune over the next decade or more.
While market conditions like those we have now can be painful, they're can also help you amass a fortune. So swallow hard, and start buying
I don’t think that Citi is going under ... but what do I know ... Someone may buy them ... but if they were to go under the aftermath would be market wide
The PE Ratio of the S&P 500 is 19-20x right now based on the entire 500 even with bills and billions in paper write downs in Q3 & Q4. There are a few companies with higher sure but overall it’s around 19-20 and estimated 15 for this year.
I’m doing low 8 figures commercial refinancing plans right now on long term holdings
nice timing for me
the difference in debt servicing is more than I live on annually
.....I’m waiting for someone to tell me Citigroup won’t collapse......
Citigroup won’t collapse
2% dividend is nice... until the current dividend tax rate gets raised from 15% up to the possible 39.6%. And the capital gain potential looks nice at a 7-PE, but what happens when the capial gains tax rate gets adjusted back to its old levels? Maybe part of the market's pessimism is tied to the doom & gloom predictions and policy "fixes" being propsed by a certain major political party...
I listen to Cramer sometimes, and he put me onto an oil trust. Now, it’s got about a 7 year life, but it puts ALL its profits back as dividends, has a positive growth in stock value, low P/E. Also got into a Fidelity natural gas fund (wide range of oil and gas related stocks). Down slightly the first quarter, but has a growth rate of 25% per year....year after year after year.
Finally, look at money funds. Not CDs but actual funds that invest in currency spreads.
Energy and money. Cant go too wrong.
What about land Ben? I have a building lot I bought almost 20 years ago. I won’t be able to retire on it as planned. Should I have sold it already or is now as good a time as any?
sw
Uh, if you would please take a look at the SP500, COMPX and QQQ’s, you’ll see that this past autumn was the closest that the markets have come to recovering to March, 2000 levels. That’s seven years.
And now that level is gone, likely to not be seen for at least a couple more years after where the market will be going this year.
What people are overlooking is that despite the government propaganda, we have inflation. In a very low inflation environment, the PE’s of around 15 are fair valuation (long term) for the SP500.
Now, in an inflation environment, subtract the rate of inflation from the 15 PE and you get what “fair” valuation in that inflation environment is. If you believe the government propaganda, we’re closing in on 4% inflation. Let’s believe them for a moment. 15 - 4 = 11, which means that the SP500 is now fairly valued for 2009 expected earnings. If inflation goes up, the valuations will have to come in. If earnings miss, the valuations will have to come down.
There’s not a whole lot of upside in this market just now.
“Won’t take 5 or 10 years”
I agree on that, but I think you might be a bit optimistic on recovery time. I think we’re about halfway down in price and 1/3 to 1/4 of the way through on time. I disagree with the earnings estimate of 11-12x 2009 earnings, since it implies a 30% recovery in 2009. I think that earnings will come in lower than estimated. That’s why I see 2008 as a bad year. It looks like the Super Bowl Indicator is going to flop for once.
I should also add that I have been nearly 100% in this market starting in August, and I am up, not down. If you want to invest today, what is absolutely critical is that you invest in something for a rational reason, not panic or greed. Time spent on the sidelines doing research is not wasted time, if it leads you to make a rational decision when everyone else is panicing.
NB when you get into those MLP (master-limited partnerships) you get a K-1 form in, oh, usually late February to mid-March.
If you do your own taxes, be prepared to deal with a whole new bunch of forms, possible foreign taxation and tax shelter registrations and accounting when you own one of those MLP’s, especially a foreign one (eg, any of the Canadian trusts).
I like those MLP’s, but you should know the tax consequences before you buy into them. There is additional paperwork and hassle when you do your taxes.
I’ve noticed a handful of companies getting market delisting notices just in the last week for dropping under the minimum price for the exchange. I wonder if somebody compiles a list of delistings?
The recovery didn’t start that late is what I said. I actually think earnings will come in higher due to inflation and due to the weaker USD and as banks begin to not have to write down 100 billion every quarter (I don’t expect anymore very, very large write downs after Q3 of this year by US banks). I also think Oil is very near it’s peak. US demand is down 4% YoY before this latest runup and gasoline inventories are at record highs.
Earnings will be near 11x-12x 2009 earnings or better. You are not factoring in that banks are writing down ridiculous large losses that will stop at some point this year. 2009 should not have any. If you exclude those losses from last year and this year, we’d alreayd have a PE ratio of around 12x for this year. I actually think the S&P may be at 9x 2009 earnings.
I hope you’re right. I’m just concerned that this credit cycle will be deeper than the last one, and take longer to straighten out.
Well, I’m investing for a much longer period of time anyway. If it’s not trading at 8-9x 2009 earnings, it definately is for 2010 (if not better). That assumes of course that Democrats do not RAISE corporate tax rates.
I much agree about that.
My 3,000 invested is so pitfully small. I think it’s mostly in mutuals with Scottrade.
I hardly know what to study.
I’ve been of a mind that folks would do well to find the companies ran by bright, responsible, gifted, authentic Christians . . . those companies, all other things being equal, WILL do better regardless.
But I’ve never managed to get much research going ferreting out such companies.
And my ignorance on the list of things to measure is far greater than my knowledge and understanding.
I also believe that companies that treat their employees charitably, kindly, responsibly and their customers fairly will do best. But how to ferret out that info escapes me, too.
thanks tons for your kind reply.
On longer time period — me too. On tax rates—we’ll have to see how the election plays out. Obviously, HRC and BHO will raise the dividend rate and the capital gains rate if they gain office. The market won’t like that, although it will eventually adjust to it.
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