Investors are pressing the "Sell" button as fast as they can,
dumping stocks that have already fallen 20% or 30% on fears they'll
fall even more in the sessions to come. The current environment
appears based on fear more than fact.
Dow Jones Industrial Average (DJIA)
was merrily loping along toward the 13,000 mark just a few weeks
ago, just as
got underway. Since then, most companies have delivered quarterly
results that could best be characterized as "decent" to
"excellent." Yet the Dow has been in utter freefall, moving below
12,500 on July 27 and below 12,000 on Aug. 2. Just a few sessions
later, the Dow is now below 11,500, putting us right back where we
were at the start of the year.
Is it time to throw in the towel and save your funds for sunnier
times? No way. In fact, history has shown that you really make
money in stocks when you steadily sell into a rising market and
steadily buy into a slumping market. It takes a lot of intestinal
fortitude to "zig" when others "zag," but this is how the most
successful investors, people like Warren Buffett and George Soros,
made their fortunes. [See: "
A Review of Pase Economic Downturns
" from InvestingAnswers.com]
For active investors, this recent selloff is quite disturbing.
We're less than three years removed from the last market plunge,
and many hoped such a traumatic event would only come along once
every decade or two. Right about now, many are wondering if we
should brace for another 2008/2009-style meltdown. After all, the
downdraft that started in the summer of 2008 would continue for
more than six months and the market only found a floor in March
Yet in many respects, the current selloff has little to do with the
drop from three years ago. Back then, companies suddenly found
themselves without access to credit as the financial system seized
up, a wide range of firms carried staggering amounts of debt that
they took on during headier times, and consumer spending virtually
Recent economic data are pretty sobering as theeconomy looks to be
headed for zero or even negative growth. But companies are so much
stronger now, with leaner cost structures, far less debt and
recordprofit margins. Consumers are cautious and spendthrift, but
not hiding in closets as they were back in 2008. If 2008 felt like
Armageddon, 2011 simply feels like a more run-of-the-mill economic
slowdown. Make no mistake: it's bleak out there. But a host of
positives are also in place, led by corporate profits, the health
of the banking system, rising exports (thanks to a weak dollar) and
still-low interest rates.
As this market meltdown is of a different stripe than the market
plunge of 2008/2009, then so is the game plan. What worked then
won't work now, and vice versa. In the fall of 2008, investors with
strong stomachs greatly profited from the "bankruptcy" trade.
Ford Motor (
Hertz Global Holding (
Domino's Pizza (
all fell below $3. Sure these companies were carrying heavy debt
loads, but savvy investors did the math and saw bankruptcy wasn't a
likely outcome. As a result, each stock offered
once-in-a-generation bargains. Each stock would eventually move
back up into the teens -- or higher, and investors walked away with
gains of 200%, 300% or even 500%.
There's a simple reason why we won't be revisiting those scary
depths: corporate balance sheets are much stronger than before.
Ford, for example, now has $8 billion in net cash and, even in a
, should see this figure rise to more than $20 billion by the end
of 2013, according to analysts in the auto industry.
This isn't to suggest that a wide range of companies are set to
imminently deliver major gains. Indeed, it now appears as ifprofit
forecasts for many stocks in 2012 will need to come down. The
current stock market pullback likely accounts for much of that
downward revision yet to come.
So whereas the theme of late 2008 was "buy the stocks that people
erroneously think are going bankrupt," now the theme is "buy great
companies that have loads of cash, steady
and can be had for single-digit forward multiples." Profits may
weaken in 2012, pushing those forward multiples from the
high-single digits into the low teens, but we're talking about
recession-era profits. Long-term investors don't tend to focus on
look like, they look to see what the company's profits can look
like when the economic picture brightens.
Let's use Ford as an example. The auto maker's stock trades for six
times projected 2011 and 2012
earnings per share (EPS)
of about $2. Let's assume business slumps in 2012 and per-share
profits fall to $1.50. Well, shares are trading at about eight
times this downbeat view. Now let's think about what Ford can earn
when the economy turns up. $3 a share? $4 a share? With a stock
trading under $12, that's simply too cheap to ignore.
What I'm looking at now...
In recent weeks, I've been looking at a number of solid blue-chip
plays that look increasingly attractive with each passing day. Yes,
shares are lower than they were a few weeks ago. But for intrepid
investors, this simply makes them more attractive for investors
with a long-term view.
As an example, I profiled financially robust
earlier this week that now sport very low valuations in relation to
their earnings and
Read the full article here
As a specific example in that analysis, I took a deep look at chip
Analog Devices (
. Back in the spring, I marveled at how the company was in the
midst of a very nice upturn in business that was yielding steady
gains and outsized profits. But recommending a stock that had run
from $28 last September to above $40 in the spring is just not my
style. I don't "hate 'em when they're loved," but I do "love 'em
when they're hated." And right now, shares of this chip maker are
in utter freefall, falling below $40 in early July, below $35 in
late July, and seemingly headed for $30.
What will Analog Devices have to say on August 16 when quarterly
results roll in? I don't know. But I do know the company is using
for a stock buyback program, and any near-term pressure resulting
from a cautious management tone simply means the company will be
able to buy back even more stock with its available funds. I also
know that thanks to heavy research and development spending, Analog
Devices has a very fresh product line yielding
gains and rising profit margins. Business may not be great in 2012,
but I've got a strong sense Analog Devices will be a proven winner
in the long term.
This logic extends to other solid companies that I've recently
profiled. Companies that generate lots of cash when business is
lousy can presumably really fatten the balance sheet when business
trends improve. This was my take on
I profiled this week
In a similar vein,
I recently said
the management team at
Delta Airlines (DAL)
was doing well by sharply cutting expenses in this era of economic
uncertainty, holding off on any major investments to focus on
free cash flow
generation. The airline industry is a notoriusly bad place to be
when the economy slows, which is why shares are falling sharply.
ButDelta 's management team is rewriting this history with a much
wiser approach to cash management. Might the airline industry
weaken in 2012? Sure, but
's weaker rivals are likely to feel much greater pain, cutting back
in places that allow Delta to seize the advantage.
Action to Take -->
The plunging market signals the time to step up your research.
Ideas can be found among companies with strong insider buying,
bulletproof balance sheets, high and sustainabledividend yields,
expanding international sales, etc. The list of potential positives
simply can't be ignored.
To be sure, you want to stress test any stock to see if the company
can handle a reasonable drop in sales in 2012 and 2013 and still
emerge with its balance sheet intact and profits in the black. The
fact many of them now trade at fresh lows sets up an important
entry point. These stocks may fall even further in coming weeks,
but since it's hard to time a market bottom, the long-term view
should now be dictating your thinking.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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