This current bear market is similar to 1987 in terms of the speed of the decline. When it bottoms has yet to be determined, but one thing is for certain, it will find a bottom. In fact, that is exactly what the market is doing, discovering price and searching for a bottom, asserts Kelley Wright, income investing expert and editor of Investment Quality Trends.
Like all previous bear markets there is a state of panic, which is based on the unknown. And, until the unknown becomes known, the panic, and to an extent some irrational behavior, will continue. You could say that bear markets are like viruses, they have to burn out.
More from Kelley Wright: Kelley Wright's Timely Ten: Investment Quality Trends
Okay, so we’re in the thick of it, so what do you do? I think that first you have to understand that current prices do not reflect intrinsic value, they reflect emotion. Since emotion is fickle and fleeting, it will not only fade as information becomes available, it will turn on a dime. This is to say that now is the time to prepare for the recovery. Oh yes, there will be a recovery and I would suggest it will be a violent recovery.
Secondly, if your holdings are Select Blue Chips, they are high-quality companies. One of the criterions for becoming a Select Blue Chip is having paid uninterrupted dividends for 25 consecutive years.
Over the course of 25 years a company will weather pretty much every economic and political storm there is. The fact that they weathered those past storms provides some confidence that they will weather this one too. Everyone has paper losses right now. They only become actual or realized losses if you sell.
If there is nothing fundamentally wrong with a Select Blue Chip, meaning its dividend is secure and it is only down because market participants are selling indiscriminately out of panic, then there is no reason to sell. Based on my experience, and this isn’t my first rodeo, this too shall pass, and price will recover.
In short, the universe of Select Blue Chips is predominantly in the Undervalued category. When I run the numbers for the updated Spreadsheet tonight, I will also calculate the percentage in each category. My suspicion is that the Undervalued category is in excess of 60%. If so, historically, we are starting to get close to percentages seen in the Undervalued category at previous major bottoms.
For those of you who have ever said, “I wish I had the opportunity to buy after a major correction or bear market,” it’s time to get ready to put your money where your mouth is, because that time is nigh. For those of you who have ever said, “I wish I could have loaded up on XYZ stock when it was trading at that price. Man, what a bargain.” Well, the world is about to be your oyster.
A final thought or two. One, energy stocks, meaning high-quality legacy stocks, are not going out of business. Will their earnings decline in a recessionary environment? Of course. Is there an economically viable alternative to fossil fuel today? No. The world runs on energy, so figure it out.
As for the Timely Ten, these stocks represents our current top ten recommendations from the Undervalued category. Those stocks are selected from the Undervalue category and are ranked based on their Return on Invested Capital and Free Cash Flow Yield.
Those are measures of fundamental value, and do not reflect any subjective thinking or selection on our part. The Timely Ten, therefore, are stocks that represent deep intrinsic value. This means fundamentally they are low-risk and high-potential. Because they are deep value stocks, however, there can be a time lag until the market recognizes and appreciates the good value.
JP MorganChase (JPM) — yielding 3.46%
Philip Morris International (PM)— yielding 5.89%
AbbVie (ABBV) — yielding 5.53%
SYSCO Corporation (SYY) — yielding 3.82%
The TJX Companies (TJX) — yielding 1.78%
ABM Industries (ABM) — yielding 2.71%
Walgreens Boots Alliance (WBA) — yielding 3.97%
Kellogg Company (K) — yielding 3.58%
Raymond James Financial (RJF) — yielding 2.05%
UNUM Group (UNM) — yielding 7.35%
This is the reason we offer this list with a five-year outlook. I regret the market has rejected many of these stocks this year, and some to extreme levels. All I can say is that I stand behind each recommendation because I know the research and analysis is sound. I wish I could say the same for Wall Street’s judgement.
With interest rates near zero how will banks make any money? Ok, in the short-term it will be tough. Are banks going out of business? After the Financial Crisis you tell me. Yeah, some bad actors gave up the ghost. Welcome to capitalism.
Remember two words: Quality and Value. Even great companies get mispriced during bear markets, sometimes incredibly so. This is when they offer the greatest value. Hello?
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