Investing in Stocks: Ignore the Negatives, Embrace Your Contrarian Side and Buy Stocks Now
by Alexander Green, Investment U’s Chief Investment Strategist
Tuesday, September 7, 2010: Issue #1338
When the Dow bottomed near 6,500 in the thick of last year’s financial crisis, few investors thought it was a good time to buy stocks. Sentiment was overwhelmingly bearish.
So when the market bounced higher, the consensus was that it was a “dead-cat bounce,” a bear-market trap. But it wasn’t.
As the rally gained speed, investors began to think that perhaps the worst of the financial crisis was indeed over and they would buy some stocks on a retracement or when the market tested its lows.
But that didn’t happen either. In fact, the Dow didn’t tire until it crossed 11,000 in May. By then, the market was up over 70% in just 14 months.
That was pretty depressing to investors sitting on the sidelines, earning microscopic yields on their cash. Many were so busy licking their wounds from the sell-off that they made little or no new investments during the rebound.
So what should you do now?
Investing in Stocks: Follow the Earnings
Since the market high four months ago, the Dow has lurched back and forth. But the primary direction has been down. No surprise here. After a rally of this magnitude, a correction is not unusual.
But don’t be like last year’s investors and miss the next rally. Now is a good time to put money to work in high-quality stocks.
In fact, the market is almost as cheap today as it was during the depths of despair in March 2009.
How is that possible when the Dow is more than 3,500 points higher?
Because a stock or index price doesn’t tell you anything about valuation. What matters are earnings and the multiple that the market puts on them.
Three Reasons Why You Should Buy Stocks Today
When measured by profits, the market is almost as cheap today – at 14.9 times trailing earnings and 12.2 times prospective earnings – as it was in March last year.
That’s because earnings are up. Way up. Second quarter profits at U.S. companies hit an all-time record.
A year and a half ago – when investors should have been buying stocks – the media was busy telling them about The Great Recession and how the world was coming apart at the seams.
Today, it provides saturation coverage of home foreclosures, personal bankruptcies and endless political carping. And because we’re blanketed with bad news, few investors see the positives. Consider, for example:
- The Fed has taken interest rates to near zero. That makes it cheaper for consumers and businesses to borrow. It also makes ultra-low-yielding cash a horrible investment.
- Inflation – the great bane of both stock and bond investors – is M.I.A. With the consumer price index showing virtually no increase, businesses don’t have to battle rising costs.
- Around the globe, most stocks are unloved and undervalued. Historically, when the P/E of the S&P 500 has dropped dramatically – as it has since the highs of May – it isn’t long before the market puts on a significant rally.
A Leaner Corporate America Could Drive the Next Rally
I know analysts are saying that earnings won’t be anything great. But they could be wrong – yet again – for two key reasons.
- Businesses have tightened up their cost structure, laid off unnecessary personnel and refinanced debt at lower levels. Even a modest uptick in sales could deliver surprisingly good bottom-line growth.
- It’s so cheap for businesses to borrow right now that I expect we’ll see many of them issuing debt to buy back their own shares. This could lead to robust growth in earnings per share, even if growth in gross earnings is less dramatic.
The bottom line?
Investing in Stocks: The Ultimate Contrarian Indicator Right Now
Stocks today are almost as cheap as they were when the Dow hit 6,500 18 months ago. And the macro-economic picture – while always cloudy – is a heck of a lot better now than it was then.
As an investor, look at your options. Cash pays next to nothing. Treasuries yield little more and could easily drop precipitously. Real estate is a non-starter, due to illiquidity, a flood of foreclosures and tough new lending rules.
But stocks offer excellent potential. And if you know anything about contrarian indicators, the fact that so few believe it only confirms it.
Good investing,
Alexander Green
Related Investment U Articles:
- Oil Stocks: Why Now Is The Time To Buy
- Stocks Are the Cheapest in 15 Years… And Here Are Three Big Bargains
- Five Takeaways From Warren Buffett’s Annual Letter to His Shareholders
- Why Bad News Should Be Your Buy Signal
- The World’s Greatest Uptrend for Income Investors
9 Responses to “Investing in Stocks: Ignore the Negatives, Embrace Your Contrarian Side and Buy Stocks Now”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
Saving money is actually the best option. It’s a great way to increase a retirement plan. And there is no risk. Although the general stock market earnings are up this year compared to March 2009. We need to remember that March 2009 was a disaster year in company earnings. And how stable are the existing earnings in this jobless recovery? I think the market is exciting but are there really that many bargins? How many of us consistently beat the averages? Does anyone really know the upside gain in this market vs the downside risks?
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I believe your article is on the money. Stocks are very unloved right now and anyone I talk to is extremely risk adverse and thus down on stocks. They tend not to see that the low yield/ high price of bonds is a warning signal about a topping bond market and they don’t consider the possibility of future inflation a risk either. I argue that one should buy solid companies ( low debt) with a history of paying investors dividends as a subsitute for some of the income component of your portfolio.
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Mr Alexendar Green’s deductions in money matters have always been invaluable and to the point.The present artical also is no exception to that.I am sure by following his suggestions while also applying our trading experience and commonsense, we should be able to achieve good results.
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Hi Mr. Green, thank you very much for sharing your comments to give us an excellent insight on how to invest and why is now time to invest in stocks. I always enjoy your comments which are full of knowledge and common sense. Thank you again and look forward to continue reading your valuable comments regarding how to invest. When possible, please include something regardind fixed income with minimum risk for retired people.
Regards,
Jorge
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Thank you for the many upbeat essays. It is so grim “out there” that it’s a pleasure to see someone as optimistic about the market as I am. I refuse to accept all the noise on TV and the gloomy predictions. I was sorry to see an Alert newsletter (sponsored by Oxford Club) was promoting 2012 Puts on the SPY. Ack! Not my idea of optimism. However, I’m no fool. I’m sure we have some rough times ahead. But thanks!
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Good and understandable information. Will be sharing with my adult children to help them ease in gently to a better understanding of investments.
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Dear Mr. Green,
I saw your article or (blog) on Buying Stocks Now. You lead to many keen insights, and I’ll keep them in mind, maybe your right. Of course you heard about the new Euro jitters.
I got into trading very late, two months after the crash and managed to open up a trading account before the March 09, rise. I was trying to buy (AIG), but my skills and understanding were raw and not good, I couldn’t get AIG because it had gone into Micro-cap range, and for some reason didn’t call the broker to purchase, it was at .79 cents by early March, 09. You know the rest. But if I had purchased (AIG), 200 shares, and held for 9 months, sold in October, and subscribed to a micro-cap service, my $7,600 put on a string of micros could have netted only $1.5 million, in Jan. 2010. (My pain). Stephen.
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Alex,
The problem with the P/E ratio using prospective earnings is that they are based on a GDP higher than the current level. Projections from some economists like David Rosenberg show a GDP decline to .5% or possibly negative over the next 12 months. This would take the P/E ratio to a higher level than that based on trailing earnings. There are some good values on good stocks like MCD that pay a decent dividend. But those values will be even better over the next 12 months. I’m waiting for P/E’s to enter the single digit range as they did in the early 80′s.
However, I do buy the recommendations from the Chairman’s Circle advisory services as they are often poised for a shorter term return.
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Everyone has an information bias, and Mr. Green, whose columns I’ve learned a lot from and who I generally like, is no exception. Right before I read his article about contrarian indicators saying it’s time to buy stocks I read one that says that there are strong contrarian indicators (like the fact that most mutual fund managers are very bullish right now, shown by their near-record-low cash positions) suggesting that the market is near a turning point. For me, the lesson is this: take what you can from smart people like Mr. Green, and if you enter a position, manage it wisely by setting stop losses. Remember, September is far and away the worst month of the year, and we still haven’t seen a major pullback from the rally that started March 09. Plus the Hindenberg Omen hasn’t played out yet, and it’s generally pretty accurate. Be cautious.
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