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Why stop buying now when stocks are the cheapest that they've been in a decade?

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November 17, 2008 – Comments (16) | RELATED TICKERS: WAG , DD

 

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.

Deej

16 Comments – Post Your Own

#1) On November 17, 2008 at 12:21 PM, kdakota630 (29.69) wrote:

Chances are that anyone who is visiting a site on investing like The Motley Fool has been investing in stocks for quite some time.

Really?!?

Personally, this is where I came to learn about investing and had virtually no experience when I got here.

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#2) On November 17, 2008 at 12:34 PM, ByrneShill (74.77) wrote:

The problem with that reasonning is that milions have lost their job. So maybe you and I can keep buying stocks, but not these peoples. Those who are behind in their mortgages payment can't really buy stocks either.

Also, anyone who's been buying in the last few years and didn't sell earlyer this year might now have that much money to buy more. That's my case. So it's either go to margin or miss the good opportunities.

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#3) On November 17, 2008 at 12:46 PM, VTEngineer2001 (< 20) wrote:

I kind of have a problem with this logic. Stocks are cheap based on what? Their projected earnings, right? Well, seems to me that the 4th quarter projections that most analysts have out there today are quite rosey - too rosey. Case in point: this year's third quarter earnings. A few months ago these were projected up, only to be revised at the last second and overall the third quarter had something like a 14% decline when compared to last year's same quarter earnings. Companies valued based on these numbers all of a sudden didn't look as attractive.

I think that these future projections will be revised lower - way lower to reflect today's market conditions. When is the question (should be sooner so as to not give an illusion of better times). Then what happens to those valuations? All of a sudden, they don't look so good.

To everyone out there, please do your own DD and consider future global events before purchasing......

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#4) On November 17, 2008 at 1:06 PM, VTEngineer2001 (< 20) wrote:

........U.S. in Recession, Survey Says The U.S. economy is in recession, will contract at a faster pace in the fourth quarter, and the decline will extend into early 2009 as rising unemployment halts consumer spending, according to the National Association of Business Economists’ poll of 50 professional forecasters. The survey expects America’s real gross domestic product to fall 2.6% in the fourth quarter and drop another 1.3% in the first three months of 2009.

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#5) On November 17, 2008 at 1:18 PM, TMFDeej (99.31) wrote:

VT Engineer, the time to purchase stocks is when things are going badly not when everyone else is buying them.  Anyone who waits until they are 100% positive that current recession is over...and make no mistake about it it will eventually end...will end up paying much more for stocks than those who purchase when times are tough.

Stocks are a ton cheaper today than they were a decade ago.  Do you really believe that Dupont is going to stop selling chemicals or that Walgreens is going to stop selling drugs?  These companies will survive even if their earnings do slow some next year.  Their stocks are less expensive today then they were ten years ago despite the fact that they have a ton more assets, earnings power, higher book value, etc...

If I recall correctly, you are very bullish on oil.  How can you be such an oil bull if you are so bearish on the state of the economy?  Don't you think that the world will eventually pull itself out of this economic mess?  If so, wouldn't it make sense to gradually purchase stocks month by month over the next year until things do get better and everyone else jumps back in.

------------------------------------------------------

Hi Byrne.  Thanks for commenting.  Is your point that the unemployment rate will be so high that others won't have the money to buy stocks and earnings multiples will be low?  There is a ton of money sitting in cash on the sidelines waiting to invest in something.  Fear is what is preventing people from buying stocks, not unemployment.  There wouldn't be such a huge demand for treasuries if there wasn't money out there to invest.

However, for the sake of argument let's assume that you're right and that earnings multiples will not rise.  If one purchases stock in companies that pay solid dividends, this really doesn't matter much.  Collect 6%, 10%, 15% on your money and wait for things to turn around.

Deej

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#6) On November 17, 2008 at 1:28 PM, TMFSpiffyPop (99.41) wrote:

While it's absolutely true that those who are fully or near-fully invested don't necessarily have ready cash to all of a sudden plunge in at today's low prices, that only puts an even greater emphasis on SAVING 5%-10% of your salary check every two weeks and, yes, dollar-cost-averaging into this market. The big challenge -- and big win -- for most Americans will be becoming in every way (it starts with action, not talk) net savers. This is where our country needs to head, and those who faith here leads to real action will be the ones that are rewarded.

Another good blog, Deej. --DG 

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#7) On November 17, 2008 at 1:33 PM, TMFDeej (99.31) wrote:

Thanks Dave.

Deej

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#8) On November 17, 2008 at 1:35 PM, TMFDeej (99.31) wrote:

Thanks for reading KDakota.  If you have a 401K or an IRA than you have been investing in the market for the past decade, just doing so passively.  If you are young enough not to have either of these things, you are in great shape because you are getting in much lower than anyone who has started one in a long time.  Kudos to you for taking the time to learn about investing.

Deej

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#9) On November 17, 2008 at 1:55 PM, wolfhounds (29.15) wrote:

I would add that there are a slew of great smaller companies that have been sliced and diced beyond their long term earnings potential to the point that they must be bought in this market. This morning ISRG was downgraded (of course, after it dropped from 340 to 149) and sank to 128. SNHY has dropped from 43 to as low as 12.78. VTIV has dropped from 35 to below 10 and is still at 11.5 after posting solid earnings and 2009 forecast. I bought these and will continue to look for similar values like PACR, yielding a solid 6%, earnings growing and margns rising due to oil price drop.

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#10) On November 17, 2008 at 2:20 PM, kdakota630 (29.69) wrote:

Deej, I'm in Canada, so I have an RRSP, (or more accurately a LIRA) from my previous job, and I was making regular contributions into mutual funds, so you are correct, I was investing passively.

After reading a couple of Motley Fool investment books and realizing I could be doing far better for myself I finally decided to start taking a more active role in my investments.

My biggest regret is not starting earlier.

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#11) On November 17, 2008 at 6:28 PM, bdash (27.36) wrote:

Deej,

 

personally I agree that this is the time to buy stocks (I have been on the way down) but comparing prices to 10 years ago is a poor idea as we are currently in a recession and in 98 we were in a bubble. Comparing to 6-7 years ago would make a lot more sense

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#12) On November 17, 2008 at 7:37 PM, DemonDoug (84.09) wrote:

bdash, a lot of companies are at or near their 5 year lows, or at prices not seen since around 9/11/01.

Deej - again we are very much aligned in thinking. I love DD at these levels. We both have mentioned many other blue chip companies, both in and out of the energy sector that I think are worthwhile investments.

There is a difference between caution and fear. To me, taking a small position in a company like DD is a cautious approach to diversifying away from the dollar. Longer-term, DD may have issues because their input costs are highly oil-dependent. But this basically means they are going to have a blowout quarter or two while oil is depressed. And 6% or more - can't beat that with a savings account or a CD.

Fear is being completely closed off to the idea of investing in a solid blue chip company because the sky is falling.

As Andrew Left says "Cautious investing to all."

(Just make sure whatever stock you are looking at doesn't show up on citronresearch.com)

Deej - sorry about VE. Looks like both VE and CBI (our two biggest touts from the spring and summer) have has some pretty massive fundamental issues.

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#13) On November 17, 2008 at 8:09 PM, TMFDeej (99.31) wrote:

No worries Doug.  I was wrong on VE as well.  Both it and CBI, particularly the latter, ended up having worse than expected operational problems.  Add to that a bear market and for CBI an implosion in the energy market and ouch.  I still like them both at this level, but I am not putting new money in either at the moment with so many other attractive stocks out there right now.  I'm not selling either.  If I had to choose one, I'd probably go with VE at this point.

Deej

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#14) On November 18, 2008 at 11:53 AM, ByrneShill (74.77) wrote:

Saving 5-10% of your income is nice, but if you had a 100k portfolio that just got a 30% haircut and make 100k/year (which is way over the average US wage btw) so you can add 5-10k to your account this year, you won't invest much to cover your losses.

Now if you just lost your job or your house payment just reseted (is that even a word?) higher, you might not have a dime to spare, maybe you'll even have to sell some stocks to pay for next week's grocery.

So yeah, in theory your advice is good. In practice, those bilions in treasuries aren't in the hands of Joe 6-pack (dunno if I can be considered a Joe 6-pack, Guiness comes in pack of 4, but I know I don't have a single $ in treasuries). I think a lot of MF readers were 100% stock when the (expletive) hit the fan, and some of us have converted to a diet of kraft diners and dog food to save money for our brokerage account, but the small earner can't expect to come up with 10k+ in a matter of months.

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#15) On November 18, 2008 at 1:04 PM, VTEngineer2001 (< 20) wrote:

Deej: Long term, yes, I agree with your sentiment and agree with the overall viewpoint of this blog - I think you misunderstand my point: many people simply follow someone else's direction b/c of who they are. "Cheap" is a relative term. In the short term, things could get worse. In the long term they will be better. But what is the definition of "short"? 1 year, what if it were 5 years?

I am bullish on oil long term b/c it is a finite commodity and demand will continue to rise, with a couple of hic-ups now and then. I think this is a no-brainer, but would not broadcast this without reminding whomever that nothing in life is a guarantee. It is also easy for me to be bullish on the market simply b/c of my age - I have many years to recoup any losses (34).

I don't support market timing, and I do support gradual purchasing on the down days, but this post just seemed a little too pushy - this is my point. Let's face it, you have a tremendous fan base here and a pretty faithful following - no problem there. However, with great "power" comes great responsibility.

Please note that the tone of my response is geared toward "discussion", not critical. Thanks. 

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#16) On November 25, 2008 at 1:12 PM, jgseattle (32.71) wrote:

I agree long term.  I have focused on essential services or commodities for daily life.  Water, oil, transportation, electicity, food.

In caps I just put in a lot of commodity positions.  Real money averaging into XOM, CNQ, ABX, PWE, PAAS, AES, and BAM.  Looking for a good pipeline operator but cannot determine if I want to go with KMR or another. 

I have been over 80% cash and with recent purchases it is now about 75%.  I would be going into the market a lot stronger if I was convinced we would not see deflation.

Someone posted about the cash on the sidelines.  I do not know how much is in cash but it has to be a lot and when people get over the fear and have a clear idea of what is going to happen this cash should be put to work resulting in a rally.

I have to say the US government is not helping with clarity.  TARP would not buy mortgages now it is.  The treasury needs to provide a more consistant message and follow up.

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