Saturday, October 8, 2011
According to the Financial Times, the S&P 500 entered official bear market territory this week, when the index plunged to less than 1,100 in the first few minutes of trading on Tuesday. That puts the index – which accounts for roughly 80% of U.S. stocks by market cap – at nearly 20% below its April 29 peak.
I love bear markets. I'm a greedy investor... And without bear markets, investment bargains don't happen. More on that in a minute... But first, let's check in with perhaps the biggest bear market hater in the world...
Federal Reserve Chairman Ben Bernanke would make a terrible investor. He hates bear markets and believes it's his duty to make the stock market soar out of sight.
Earlier this week, in testimony before the Congressional Joint Economic Committee in Washington, Bernanke said the Federal Reserve "will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability."
Why can't he just say, "I'll keep printing money until the stock market goes up"? Price stability is the Federal Reserve's euphemism for its policy of constantly printing money so there's always some inflation in the economy. A soaring stock market makes people feel rich, inducing them to spend money... until they go to the grocery store... or the gas station... or the clothing store... or anywhere else they need to go to survive. Then, they discover that the newly printed money seems to have made its way into everyone else's hands.
Helicopter Ben Bernanke might hate bear markets, but I love them. Without bear markets, I'd likely be out of a job. Bear markets create investment opportunities. Bull markets reduce the opportunity set and guarantee lower future returns. Bear markets are necessary, useful, and highly beneficial to a real investor. Bull markets are a curse because they lower that investor's future return potential.
Earlier this week, I ran a quick stock screen on Bloomberg comparing enterprise value to free cash flow. Enterprise value is market cap plus debt minus cash. It's the value of the business, independent of net cash.
I was looking for companies with relatively little debt, trading at cheap multiples of free cash flow. Here are the 10 largest names by market cap...
I know a few of these companies well. But I don't know much about most of them. For the sake of argument, let's say they're all sound, safe businesses. The average multiple of enterprise value to free cash flow is about 6.5. That corresponds to a yield of about 15.4%. Right now, the 10-year U.S. Treasury note is yielding just 1.9%.
This group of 10 businesses is yielding over eight times more than the obligations of a bankrupt government intent on debasing its currency. Some of these companies have the safest, cash-loaded balance sheets in the world.
The choice shouldn't be difficult. Based on our little exercise, you should sell U.S. Treasurys and buy high-quality U.S. stocks, trading at single-digit multiples of free cash flow.
Among the four largest stocks on the list are three of our World Dominator picks – Microsoft, Berkshire Hathaway, and Cisco. All three are paying dividends and/or buying back shares, creating huge value for remaining shareholders.
That's what I'd buy most aggressively right now – the big, safe, dirt-cheap World Dominators. I don't think the time has arrived to pile heavily into the smaller, more speculative names. I could be wrong. (And for trying to time the market, I'd deserve to be...) But I'd start slow, play it safe... and within that context, be greedy as hell.
To guide your decisions on buying high-quality, blue-chip dividend payers, you need to read only two newsletters: my 12% Letter and Dr. David "Doc" Eifrig's Retirement Millionaire. Both of us focus on the world's safest, most relentless dividend-paying stocks.
To get an idea of how our "get paid" strategy is working right now, have a look at the chart below. This "performance chart" plots the one-year performance of two stocks you'll find in either my portfolio or Doc's – cigarette powerhouse Altria (black line) and beverage maker Coca-Cola (red line) – along with the performance of the benchmark S&P 500 index (blue line).
As you can see, these two elite businesses that regularly pay cash dividends are rising, while the S&P 500 index is sinking.
In a stagnant or declining economy, capital gains in the stock market will be hard to come by. You'll need reliable and increasing dividends to grow your portfolio. You'll need the safety of elite businesses.
I'll have a new addition to the World Dominating Dividend Grower list in the next issue of The 12% Letter, Stansberry Research's income-oriented advisory. I've narrowed it down to two possible names.
The one I like best right now has grown its dividend every year for 38 years in a row. It has grown the dividend at more than 17% per year for the last 10 years. It's the No. 1 company in its industry. It gushes free cash flow. And it's trading for around half of what I think it's worth.
To get access to the next safe, World Dominating Dividend Grower in The 12% Letter (when the issue comes out), click here.
Date Range:9/29/2011 to 10/6/2011
Date Range:9/29/2011 to 10/6/2011