Many are starting to see lots of opportunities in the US equities markets. Conventional wisdom states that a correction is a dip of no more than 10% from recent highs (for the DJIA, that’s 14,279) and that a bear market is usually more than that. Well, right now we’re down about 15%. The DJIA is about 3.7% above its 52-week low. So where does that leave us? Many traders seem very pessimistic and quite a few have capitulated, stating that the market will continue correcting. Meanwhile, economic data continues to paint a mixed picture. What should an Intelligent Investor do? Continue to focus on value. The same guiding principles hold: (1) a straightforward business preferably with a repeat purchase model, (2) a stable business, (3) decent balance sheet, (4) top notch management team, and (5) industry leadership. This is boring.
Consider Apple (AAPL). I own 4 Macs (I’m writing this using an iBook) and 6 iPods. I love their products (obviously), but their stock has dropped from about 200 down to 160. Many people were thinking it ‘had to’ rise to 300. Many of these people weren’t around in 1999 or in 1987. They refer to AAPL’s cash position–guess what: it needs cash to fund growth. The company is on a treadmill and needs the cash to continue to fund growth. If they have a disappointing “show” and fail to release the products the market expects (and let’s recall that AAPL has a history of doing this), they get crucified. It’s really high risk/reward. When, in the life cycle of the company, they no longer need the cash, they can declare a sizable dividend–which is what Microsoft did a few years back. Still, it is very hard for a company to support a mid-double digit P/E ratio for long periods of time. The market will not pay a high multiple for very long, especially if the company shows the slightest disappointment in future cashflows (earnings) due to issues with products, markets, etc. If in the midst of this the economy gets tough (recession or worse), consumers may have to choose between necessities (food, shelter, water and clothing) and discretionary purchases. Which do you think they’ll choose?
Many companies focus on relatively mundane products. Their money is just as green as the money that comes from glitzier companies. I will be highlighting a couple of these shortly. One is in the food industry and the other one specializes in high tech machining.
2 comments:
Unfortunately for those of you investing in stocks like Mcdonald's and Yum brands Apple computer wallmart wallgreens many of these companies do much business in china you can expect only mediocre investment returns over time. The really great returns in these type of stocks were made decades ago when they were small unknow companies unlike today.
Apple has seens it peak stock price time to sell.
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