Market Correction Coming? What’s on Your Greedy List?

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With the S&P 500 trading near a five-year high amid tepid economic growth, it’s not exactly surprising to hear a near-deafening chorus that we’re ripe for a correction. From mid summer 2012 through mid February the market gained 13.6%. Sure, its pulled back a tad over the past week or so, but stocks are by no means cheap.

The Shiller 10-year cyclically adjusted price/earnings ratio (CAPE) hasn’t been anywhere below its long-term average of 16 since the depths of the financial crisis, but it's worth noting that recently it’s continued to move higher as animal spirits have pushed prices up while earnings haven’t kept pace.

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S&P 500 Cyclically Adjusted Price-Earnings Ratio Chart

That doesn’t guarantee a correction is round the corner. But even if it were, long-term investors should welcome the opportunity to buy quality firms at a lower price.

That strategy has worked pretty well for Warren Buffett over decades. And back in October 2008, amid a biblical correction, he took to the New York Times op-ed page to explain why he was buying U.S. stocks in his personal account. As he succinctly put it: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”

To be sure Buffett wasn’t calling a market bottom. In fact, from the publication date of that missive to the market low in early March 2009, there was plenty more fear-inducing down side to live through.

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^SPXTR Chart

But when you zoom out a bit, the long-term case for being greedy when others are fearful becomes clear:

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^SPXTR Chart

So what’s that got to do with today? Well, hopefully a correction would be less severe than the pummeling during the financial crisis. But now’s when you prepare the bad times by getting your greedy list together. What companies would you love to own, if only their valuation came down a bit? That’s your greedy list: stocks you put on a watchlist and pounce when everyone else is in panic mode.

For example, if you happen to like dividend income, right now is a tough market. While plenty of dependable global behemoths have intriguing yields in the vicinity of 3% you’re stuck paying a lot for that income. McDonalds (MCD), Coca-Cola (KO), Automatic Data Processing (ADP), and Johnson & Johnson (JNJ) all have dividend yields around 3%, and have been growing that payout for at least 25 consecutive years. That’s music to an income investors ears. But the price isn’t exactly cheap when compared to the 14 p/e for the S&P 500 over the trailing 12 months.

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MCD PE Ratio TTM Chart

Those are time-tested companies you know are going to keep making their dividend payouts. When the market corrects you have a chance to buy ‘em a bit cheaper.

Looking for other stocks to consider adding to your greedy list? Check out our shopping list.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.


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