Why stop buying now when stocks are the cheapest that they've been in a decade?
Chances are that anyone who is visiting a site on investing like The Motley Fool has been investing in stocks for quite some time. To those of you who have been purchasing stock over the past several years, I pose this question:
Why stop buying stocks now when many companies are the cheapest that they have been in the past decade?
If you stop playing the game when you have a low score, you are guaranteed to lose. However if you take advantage of the low share prices that many high quality companies are trading at today five years from now you will be very happy that you did.
The current bear market has sent the share prices of hundreds of companies to their lowest point since the last bear market in 2002. Approximately a third of the S&P 500 is now valued at less today than it was ten years ago. An amazing 61% of stocks now have one-year trailing P/E ratios of less than 10. I realize that peak earnings in a credit bubble environment aren't the best thing to look at and that earnings will be under pressure in 2009 and possibly beyond, but stocks are very cheap today compared to what they have been over the past decade.
The Wall Street Journal published an excellent article on this subject today:
Finding Gems in Market Debris - Price Declines Leave Many Stocks at Historically Low Valuations
As the article points out, many industries are an absolute mess right now, including autos, financials, and builders, and the companies within them deserve their low valuations. However, quality companies with solid balance sheets like Boeing (BA) and Down Chemical (DOW) have single digit P/E ratios. I know that demand for their products will slow, but they will also benefit from the dramatic fall in commodities prices that were pressuring their margins. Powerhouses like IBM, Cisco (CSCO), Intel (INTC), and Disney (DIS) have low trailing P/Es as well.
How about Walgreens (WAG)? The drugstore chain's stock is currently 29% lower than it was during the last bear market in 2002 and it's down 9% over the past decade. It currently trades at around 10 times trailing and estimated forward earnings, a fraction of the multiples has been awarded in the past. It's hard to argue that WAG isn't a better, larger, more valuable company today than it was a decade ago.
Dupont (DD) is another one. It sports a solid 6% dividend yield, an incredible stable of patents, and it will likely be heavily involved in solving the future problems that the world faces from food shortages to renewable energy. However, its stock is 54% lower today than it was a decade ago. It trades at an extremely attractive trailing and estimated forward P/E of 9.
Individual investors can use downturns like this to buy "best of breed" companies without having to pay the usual premium that is associated with them. As long as you have a long-term time horizon and a strong stomach that can withstand a possible additional 10% to 20% drop, buying pieces of outstanding companies a little bit at a time month after month will be very rewarding in the long run.
I have been using this bear market to buy stock in well-run companies, like this article implores. However, my personal investment philosophy has morphed to now require companies to pay attractive dividends thatI believe are sustainable. Some fear that we are entering a prolonged period of stocks trading at low earnings multiples like we saw in the 1970s. I think that there is some validity to that line of thought. I would rather collect an outstanding stream of dividends over the next several years than wait for Mr. Market to stop being fickle.