Is it time to bargain-hunt for stocks?

In My Humble Opinion
1

Okay, first of all, let me say to everyone reading: If you want to lose your money (and you will) I recommend Las Vegas over Wall Street. In Las Vegas, at least you’ll have fun, and get some free food and booze.

That said…

The whole stock market is slumping. Someone(s) seem to be convinced that we’re headed for a recession. I don’t see it, but then WTF do I know about economics? Jack shit, that’s what. Still, there appear to be some awfully good bargains in tech stocks out there right now.

Oracle and Cisco both seem to be trading for about $12 a share. Sun is down to $8 (!!) a share. The Motley Fool ran an article, http://www.fool.com/Specials/2001/sp010925sixa.htm, recommending some decently undervalued stocks - several of which were tech stocks.

Do we have any stock market analysts or other people who know the market? What do you think, is it time to “buy low”? Am I nuts for contemplating throwing a couple hundred bucks at some tech stocks on the off chance that I’ll luck out and maybe break even?
-Ben

2

Occurs to me post-posting that this might be IMHO or even GD material more than GQ. Move away, mods…
-Ben

3

This belongs in IMHO, so I’ll move it.

bibliophage
moderator GQ

4

The best way to select stocks has always been hindsight.

Ask any “expert” who has a newsletter, and his credentials will usually include 3 or 4 good deals in a row.

Since you mention Las Vegas, I’m sure you realize that you can win 3 in a row 1/8 of the time flipping a coin.

Now calculate how many million people who pick stocks and you will see why so many people consider themselves experts.

A run of 7 in a row in common in those terms, but the poor “expert” never doubts that it is his “skill” and not chance that has produced the results.

5

I heard Warren Buffet quoted on NPR as saying that he wasn’t selling and he would be looking for bargains. (This was about a week ago.)

6

Yeah, but what does Warren Buffett know about high finance. Always singin’ about margaritas and stuff.

7

Those who say buy are usually those who own the stocks they suggest you buy. Clever. I knew some mags that ran stories on which stocks to buy, turned out the mag owned a few of them :slight_smile:

When the war starts, expect stocks to drop again, or so they said. Not that I own any, see.

8

This should be taken as IMHO and not as investment advice. As an ex-investment banker and a bear market vetern (Tokyo, '94 Asia crash, '97 Asia crash) now is a good time to invest IF the economy doesn’t fall apart. The Fed’s interest rate cuts, tax cuts and now increased government spending should flow through to the economy in 2002. However, if we get into a full blown recession, the downward spiral of layoffs, people start losing houses, consumerism drops to nothing, then you’re about 2 years to early to buy.

Don’t forget the risk of further dibilitating terrorist attacks. Although, if the US starts to bomb the piss out of someone, you’ll probably see a market rally. Remember, stock markets hate uncertainty. When military action actually starts as in the Gulf War, it removes a lot of uncertainty.

Finally, the number one mistake investors make in a bear market is that “the stock has fallen 75% therefore it must be cheap.” Look at most fundamental indicators for a stock and the broader market such as price-earnings ratio (PER), price to book, etc. and see if the stock is trading at historic lows over the past 20 years. For example, the S&P 500 is currently trading at around 18 times PER. IMHO, the earnings will have to be downgraded for 2001, so the “real” PER is more like 20-25 times. IIRC, it’s traded in the 10-14 times level for most of it’s history. Therefore, in a bad economic scenario, the S&P 500 could decline another 50% from here until it reaches a point where the fundamental value brings in buying for the long term.

Apply the same logic to individual stocks. Factor in for the IT industry a global slowdown in IT spending.

Take a look at where the index and individual stocks bottomed after the 90-91 recession. That approximate level is where the market is going in a very bad scenario.

IMHO, there’s about a 50% chance that this is more or less the bottom. And about a 50% chance that the market will drop up to 50% from here.

9

I think it really depends on what you’re willing to risk, which shouldn’t be any different than the way you felt about it a month ago. If you’re going to maybe want that cash in the next 5 years, don’t do it. If you’re gonna need it in 30, it’s probably an OK risk.

I upped my 401k contributions and funded my IRA the morning the market reopened, but I’m 29, and have no intention of looking at that money again for 35 years. I figure if the U.S. economy is so terrible in 2035 that it didn’t pay off, I’m probably going to have much bigger problems than worrying about flushing a few grand now.

My personal strategy is to stick with index funds, 'cause I hate doing serious research on this stuff, and have a little pulled out of my checking account and invested every 2 weeks. If I’m not feeling the pain, like right now, if the market’s heading down I’ll increase that amount by a few percent, so I’ll know that I’ve bought at the absolute bottom when it gets here. YMMV - good luck with it.

10

As a general rule, it’s always a good time to invest. The problem is going too deep, too much, too consolidated. If you are a fool, you’ll have read their advice to get in and stay in for the long haul. If you have a bit of money, get in on some of the blue chips or something you’ve had an eye on for a while and snap it up.

Just be careful not to get caught up in some stampeded or buying frezy.

IMO

11

I’ve been contributing the maximum the law allows to my 401(k) all year, each paycheck. I threw the first half of a 2,000 dollar IRA into a total stock market index fund over the weekend. I feel very comfortable buying just now. Can it go down from here? Sure. But I won’t need the money for years. It doesn’t bother me. And since I dollar cost average in the 401k, the more volatile the market is, the better. Volatility favors he who dollar cost averages.

I don’t see a 50% downside from here. China Guy is right, in that the US market has historically traded around a 15 p/e, and went as low as 6 or 8 at one point in the trough of the 1970’s bear market.

Technically speaking, though, I think the markets have found a lot of support around current levels. And with interest rates so low, money markets yield next to nothing, so people don’t have much incentive to stay on the sidelines.

I don’t think further terrorist attacks will depress the stock market much further. They already took out the two WTC’s. That was their best shot, and life goes on. I think the real danger to equities will be if there’s an oil crisis that results from this.

On the other hand, the Fed has not only dropped interest rates to minisculity, but is also buying up bonds like crazy, and is flooding the banks with money.

The last time we saw this kind of liquidity in the system was in the 2nd and 3rd Q of 1999, ahead of Y2K. That’s what largely fueled the final nova-like rise in equity prices.

Then when Y2k passed without a hitch, the Fed abruptly cut the money supply, and stocks reacted predictably.

In this case, though, we have a friendlier Fed than we’ve seen in years. Eventually, that’s going to have an impact.

12

Have to put in my bearish two cents:

As of last week, before this week’s rally, the S&P was trading at more than 26 times trailing earnings. (according to Barron’s of last week.) Just to put this in context, this translates to an earnings yield of 3.82%. For no risk at all, you can get a 10 year Treasury paying around 4.5%. So you can take a lot of risk and be paid 3.82% for it. Or you can take no risk at all and get paid 4.5%. Think about that - long and hard.
In terms of book value, the S&P was trading at 4.82 times, the Dow at 6.26 times, both very high and nowhere near bargain levels by any conceivable stretch of the imagination - and both those figures would be higher now. Finally, gold stocks are on an uptrend and have been since last November, which is certainly not a good sign.
OTOH, I’m convinced the next 10 years are going to see an amazing amount of prosperity, once we get Osama taken care of. So I’m buying opportunistically. But always remember the risk (and that 4.5%).

13

<<As of last week, before this week’s rally, the S&P was trading at more than 26 times trailing earnings. (according to Barron’s of last week.) Just to put this in context, this translates to an earnings yield of 3.82%.>>

Well, that’s precisely the wrong way to think about it. Nobody buys stocks to buy trailing earnings. You buy stocks to buy a claim on FUTURE earnings. Basically, your equation ignores the prime determinant of stock returns: projected earnings growth. Economists are still looking for a recovery in 2002.

Moreover, earnings are just part of the picture. The market weighted S&P 500 also pays a dividend yield of 1.38%. So add the earnings, plus the dividend, and assuming zero growth in the U.S. economy for the next ten years (and are you willing to make that assumption?), you have a 5.2% return on stocks, compared to 4.5% for a 10 year Treasury. So if you’re willing to ride out the ups and downs, stocks still portend a better long term rate of growth than treasuries. The key, of course, is the term “long-term.” Stocks will be more volatile than intermediate treasuries. But that’s not really news, is it?

By the way, who told you there’s no risk involved in a treasury? That ONLY applies if you plan on holding the treasury until maturity. In the meantime, 10’s are fairly interest rate sensitive, and interest rates are already favorable for bonds. Interest rates may drop another 25-75 basis points, but that’s not a sure thing at all. If this is where interest rates bottom, then the upside is already priced into treasuries, and you’ll lose your shirt until we get close to the maturity date.

14

When it dropped to 11000, people said time to buy! Then it went to 10000, again they said, yes, buy now they are cheap! At 9000, same old story.

Some guy here bragged he bought Cisco at 20 cause it dropped so much but look at it now.

Great time to refinance your house though, thats a better investment.

15

Refinance your debt, get a home equity loan to pay off credit cards and write off the interest. Refi into a variable rate mortgage, interest rates aren’t likely to spike for a while and you can chunk into your principal if that’s your cup of tea.

Equities are a fair investment now. Don’t look for a big pop in the market for a while. Of course, if you wait until the pop happens you’ll miss out on some return.

Check out growth/income portfolios, stocks that pay dividends. MO is nice, should perform well.

Looking for an interesting bet/investment? How about a nasdaq straddle? I’m looking at short term volatility, might be fun to watch it zigzag.

16

p2, the proper way to think about these things is to compare it to something riskless, at least in terms of whether you’re at risk of losing your entire investment. There’s interest rate and opportunity risk, as you pointed out, and there’s inflation risk too. But if you hold it to maturity, you’ll get all your money back. Obviously, every time you buy a stock or short it, you are risking all of the capital you put into it. For that risk, you should be repaid, which is why the stock market, over time, does better than Treasuries.
It’s a fallacy to add up the dividend yield and the earnings yield to arrive at a likely return over time, because dividends are paid out of earnings. Every time a stock pays a dividend, the price of the stock is adjusted down to reflect that payment in recognition of this. So the projected return, over time, of stocks based on the current earnings yield is only 3.82% per year.
In practical terms, this means that even if the earnings yield on stocks is less than the yield on Treasuries, if you think, as you obviously do, that earnings will grow by enough to overcome the gap, then by all means you should go in. But way too many people don’t even attempt to come up with an analysis that takes this sort of thing into account before they go in, which is why I pointed it out. And as far as I’m concerned, BTW, projections of earnings are worthless. The only thing that counts is what it’s making NOW. No one can predict the future. The only thing you really have to go on is how whatever you’re looking at has done, and then deciding for yourself if it will continue on the same path. In this vein, you should note that earnings on the S&P have declined dramatically over the past year, and may continue to do so because of the effects of our current situation. Usually, if earnings are declining, the P/E will fall too, because projections of growth will get revised downward. Combine a fall in earnings with P/E contraction, and you have a formula for a truly vicious bear market. Not something you hear a lot about.
A far better measure than projected earnings and one of the best ways to figure out your chances on a stock is to look at the dividend, because it is a measure of the faith the management has in the business. A lot of people (not including Scientoligist or yourself, natch) don’t even think about looking for stocks that have a history of both paying a dividend and of increasing that dividend year after year, as MO does. Ever heard of Summit Properties (SMT)? It pays a dividend that at its current price amounts to about 7%, increases it every year. A beauty.
All the talk is always about Cisco or Nortel or some other glamorous tech stock. But if you look at the price action on this one, you wouldn’t even know a bear market was going on. (This is true of a lot of REITs, not just this one.) And I have never once heard it mentioned on CNBC or Wall Street Week or seen it featured in Barron’s.
Beauties like this abound, even in this bear market. But you have to be willing to do the work to find them. Part of that work involves looking at riskless investments and comparing their return to what you’re looking at. Even more of that work involves going in with your eyes open to the risks you’re taking.

17

Pantom, if earnings are falling the PER goes UP not down.

Historic earnings is not what most professionals in the market look at. They look at projected earnings. This is what they get paid and rewarded on. No one cares what a stock did, they want a reasonable probability on what it is going to do. Granted, most analysts are inept, and there is a huge bias toward the buy story. Caveat emptor when it comes to Wall Street analysis for anything but their own proprietary traders.

You are correct that earnings are probably way too optomistic and that the street hasn’t haircut 2002 earnings enough.

Looking at dividends generally only makes sense with mature companies, blue chips or utility type investments. REIT’s would fall into this category. If it’s a high growth company with a high return on investment, you want the company to reinvest earnings in their core business to reap the high growth. You do not want a rapidly growing company to pay out earnings in the form of dividends because that reduces the money they have to grow on.

For example, if Microsoft had paid out dividends instead of reinvesting earnings in their growth, Microsoft would certainly not have shown the 30-40-50% (sorry, I don’t have historic numbers) annual growth that they have, and the share price appreciation would have been miniscule.

I would reiterate, that as a bear market vetern, the US stock markets are still probably 50% above where they would be a raging buy on just about any fundamental valuation yardstick.

Scientologist – you really want some fun, put on a short straddle.

18

True that if earnings are falling the PER goes up, if (big if) the price stays the same. Usually, though, on the S&P and Dow, when earnings fall, eventually so does the PER because earnings projections eventually fall also, as you get into the bear market more deeply. This hasn’t really happened yet over here. If this truly turns out to be a big bear market, then it will happen that earnings projections will get ratcheted down, and at that point the PER will drop as stocks are priced downward to reflect the lowered expectations. That contraction in the PER, piled on top of lower actual earnings, is what makes a truly awful bear.
I simply don’t trust earnings projections, so I do like looking at dividends and historic dividend growth as a strong indicator of how secure management feels the earnings are. The stock doesn’t have to pay 7%, just as long as the history of dividend growth is good. Needless to say, I don’t spend a lot of time on stocks like Microsoft or Cisco.
And you’re right it only makes sense for mature companies, but that’s what I stick to. I can’t actually remember ever buying a stock with more than three letters in the symbol. Takes too much time to say them. :slight_smile:

19

Phantom, I think you are a little confused. A low PER is generally a good thing. Price to earnings ratio is price/earnings per share. If the share price is $10 and the eps is $1. Then the PER is 10/1=10 times. Now if earnings go to $0.01, and price stays the same, the PER is 1000. If the price drops say a ball busting 90%, chances are earnings are going to be negative, which means the PER is infinite. But for the sake of arguement, the share price drops 90% to $1 and eps is $0.01, then the PER is 100.

PER tends to be historically high in a) a raging bull market like the one we had in the late 90’s or b) in a bear market. Look at the Japanese stock market and year 12 of a bear market, after Sep 11 I’m sure the PER is in the hundreds. The Nikkei traded on about a 10 PER through most of the 80’s. The companies in the Nikkei have piss poor earnings, and now despite having fallen by 75% of the 1989 peak, the Nikkei PER continues to go up. And it’s not a good thing.

Past earnings is a poor indicator of future earnings. Look at utilities in California…

20

Pantom:

Let’s take things one step at a time here:

<<It’s a fallacy to add up the dividend yield and the earnings yield to arrive at a likely return over time,>>

Really? John C. Bogle, founder of the Vanguard group, would disagree with you. There are really only three variables that go into the stock price equation: earnings, dividends, and the multiple the market is willing to pay for it. If you assume–as you seem to in your previous post–that eventually these multiples will regress to a historic average (say, 14 x trailing earnings for the S&P), then that leaves you with a determinate of earnings + dividends.

Over long periods of time, I think that’s a pretty reliable indicator in the aggregate.

<<because dividends are paid out of earnings.>>

Correct.

<<Every time a stock pays a dividend, the price of the stock is adjusted down to reflect that payment in recognition of this.>>

Nope.

EARNINGS (and EPS) are adjusted to reflect the payment of a dividend. Not the share price. For example, if a dividend-paying company were to abruptly cut its dividend without explaination, the market would undoubtably cut the price of the stock.
If a company suddenly increased its dividend, the market would not adjust the price of a share downwards, as you state, but upwards.

<<So the projected return, over time, of stocks based on the current earnings yield is only 3.82% per year.>>

Yeah, but that’s a stupid way to make the projection. Why make projections based on a “current” ANYTHING in the absence of an anticipated growth rate? And why deliberately leave dividends out of the equation? Or price multiples, for that matter (though they’re impossible to predict.)

The historic rate of return on stocks is nearly 3 TIMES your projection. Don’t you think there might be something wrong with your model?

<<In practical terms, this means that even if the earnings yield on stocks is less than the yield on Treasuries.>>

No.

There is no reason to omit dividends on stocks from your equation. Current earnings + dividends on stocks are currently superior to 10 year treasuries (which I feel have largely been bid up already. The vanishing surplus will also sap longer treasuries of the percieved scarcity value they had 1-2 years ago, when the U.S. was buying back 200 billion of them and pushing the far end of the yield curve downward. If you’re running to bonds now, you’re too late. The time to buy bonds was in late 99 and early 2000.)

Another thing to consider: Dividend income is worth much less than capital gains on the stock, thanks to taxation. Dividends are taxed as income every year, where capital gains can be deferred indefinitely, and paid only once when gains are realized, at a much lower rate than income. Since 70-80% of stock gains are capital gains and not dividends these days, stock returns tend to be of higher value to the stock holder than dividends on bonds.

>>And as far as I’m concerned, BTW, projections of earnings are worthless. The only thing that counts is what it’s making NOW.<<

I talk to professional money managers every day about their investment methodology–people at the very top of their profession, who manage billions and tens of billions of dollars. I don’t know a single one who would agree with you.

I couldn’t give a rat’s patootie about what it’s making before I buy it. The only thing I care about is what I believe it will be making AFTER I invest. Indeed, for micro caps and new businesses, I’d rather invest before it makes any money. It matters not a whit to me what the company is making now. What matters is do I believe that this company will be worth more in five or ten years from now than it is today?

<<No one can predict the future.>>

Nonsense. If you’re an investor, it’s your JOB to predict the future. Nobody gets it right all the time. But you can get it right enough to make the effort useful. Me? My prediction is that over the next 20 or 30 years, stocks will A.) be higher than where they are now, and B.) outperform bonds on a total return basis, and C.) do so more tax-efficiently.

I am investing accordingly, mostly via broad index funds.

<<The only thing you really have to go on is how whatever you’re looking at has done,>>

So no one can ever rationally invest in new businesses?

<<and then deciding for yourself if it will continue on the same path. >>

I thought you said noone can predict the future!

<<Usually, if earnings are declining, the P/E will fall too, because projections of growth will get revised downward>>

A.) Wrong. P/E multiples RISE as earnings decline.
B.) I thought you said that growth projections are worthless? Now you are implying that growth projections and stock prices are correlative! Imagine that.

<<Combine a fall in earnings with P/E contraction, and you have a formula for a truly vicious bear market.>>

Only if you buy and sell at the wrong times. I didn’t buy a blessed thing in 1999 and 2000. :slight_smile:

<<Not something you hear a lot about.>>

On the contrary, it’s all I hear about now. It’s all over the covers of popular financial magazines. Market sentiment is very low, which is a powerful bullish indicator. That’s why I’m now buying. :slight_smile:

<<A far better measure than projected earnings and one of the best ways to figure out your chances on a stock is to look at the dividend, because it is a measure of the faith the management has in the business.>>

Quite the opposite.

A dividend is a statement by the company that they aren’t aggressively trying to grow the business anymore. It’s also a way of transferring the tax burden from the business onto shareholders.

<<A lot of people (not including Scientoligist or yourself, natch) don’t even think about looking for stocks that have a history of both paying a dividend and of increasing that dividend year after year, as MO does. Ever heard of Summit Properties (SMT)? It pays a dividend that at its current price amounts to about 7%, increases it every year. A beauty.>>

ONLY for income oriented investors. For me, it’s a tax nightmare. With interest rates so low now, why is it this REIT can’t profitably reinvest that 7% to grow the business? If the management doesn’t think that investing in itself is the best use for capital, then who am I to second guess them? If I don’t need the income, then why should I invest anything here? I would probably look elsewhere.

Don’t get me wrong–SMT’s a great company and 58% total return in 2000 is no slouch. But whether it’s a beaut or not depends on the shareholder’s situation and portfolio.

<<<All the talk is always about Cisco or Nortel or some other glamorous tech stock. But if you look at the price action on this one, you wouldn’t even know a bear market was going on. (This is true of a lot of REITs, not just this one.) And I have never once heard it mentioned on CNBC or Wall Street Week or seen it featured in Barron’s. >>

Funny, the monthly consumer publication I work for has written at least two spreads on REITs this year.

<<<But you have to be willing to do the work to find them. >>

I thought you said “no one can predict the future?” How do you find them without making a prediction? Or do you just wait until the price has already gone up to buy?