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Recession Investing: Why It’s Still Not Time to “Time” the Market
by Floyd G. Brown, Advisory Panelist, Investment U
Wednesday, April 2, 2008: Issue #782
Has the market hit bottom? This is the question that market timers and traders have been asking themselves since the beginning of the year. Federal Reserve loans and rate cuts lead to market rallies. But every Fed-inspired rally is followed by the relentless selling of stocks.
If you read the statistics, the case for recession investing grows stronger every day. The economic data continues to show an anemic economy, which remains unable to steady its wobbly legs:
- Existing home sales have increased, but new-home sales are down and home prices continue to fall.
- Orders for durable goods fell in the most recent report.
- Consumer confidence is in the cellar and consumer sentiment also continues to decline.
But the big news was that GDP numbers for the fourth quarter of 2007 showed an abrupt slowdown.
The definition of a recession is two consecutive quarters of negative GDP growth. We cannot call this slowdown a recession yet, but the numbers look bad enough to surmise America is near one.
So how is an investor to respond? What is the prudent course of investing when faced with a probable recession?
Recession Investing As A Contrarian
As a contrarian investor, this question of recession investing is one that I don’t feel the need to answer.
I know the market is down, which signals a buying opportunity. And I know that empirical studies show it’s impossible to time the market and find the absolute bottom. I would be arrogant to believe I can do what the investment experts on Wall Street cannot do.
Therefore, I am not in and out of stocks with the latest CNBC breaking story about the imminent recession. Instead, I take comfort in the knowledge that today is a good time to buy stocks that I intend to hold for a period of five to six years or more. If you don’t intend to hold your stocks for an extended period, I recommend that you don’t buy equities. Put your money in a CD. The returns in CD’s are miserable right now, but at least you won’t lose money.
Also remember that even in a bear market, some stocks continue to shine. But what types of stocks do you buy when the market is down? There are numerous compelling areas of value in the market. Here are two sectors and three companies that I believe every trader interested in recession investing should be looking at for long-term success.
Wall Street Speculation On Oil Company Stocks
Speculation is rampant on Wall Street that the stocks of oil companies are too high and need to be sold. I actually consider this negative sentiment a pause in the long-term story of growing appetites around the world for a better life. As the BRIC countries (Brazil, Russia, India and China) continue to move more citizens from poverty to the lower-middle class, the need for more energy and basic materials is exploding.
Even with oil at $80 a barrel, major oil firms are printing money. They have been showing financial discipline and therefore are increasing returns to shareholders. Natural gas supplies are tightening after a return to colder winter temperatures and firms specializing in providing this clean-burning product are throwing off immense amounts of cash. Plus, the oil service stocks have paused even as oil exploration budgets are growing.
Here are a few ideas:
- Ensco International (NYSE: ESV) is a global offshore oil and gas drilling contractor and it is benefiting as oil exploration increases offshore. It’s trading at a PE of 9, with year-over-year quarterly growth of more than 12%, and return on equity of 28.5%. This stock is headed higher.
- Conoco (NYSE: COP) is the cheapest of the large integrated oil companies. COP is trading just over 10 times earnings. Conoco has had year-over-year quarterly revenue growth of almost 30%. Return on equity is 14%, but cost-cutting and consolidation of past acquisitions is paying huge benefits. Because of a larger exposure to cracking spreads from refining, Conoco will remain healthy even if oil prices slide somewhat.
Chemical Firms
The raw material for most chemicals is petroleum. When crude oil prices head higher, chemical firms traditionally suffer. In this cycle, price increases have minimized the impact of expensive oil. All across the sector we see tremendous value. So when the entire sector is on sale, buy the best firms.
My money is on Dow Chemical (NYSE: DOW).
This giant of the chemical business is trading at a PE of 12.6 and pays a fat yield of 4.6%. So not only does it pay more than CDs, you get a capital gains reward, too, when this bellwether heads higher after the slowdown.
Whether the market is at the bottom, only time will tell. But if you chose stocks wisely for the long term, you need not lose any sleep.
Good investing,
Floyd
Floyd Brown, a regular contributor to Investment U and The Oxford Club, began his highly successful investing career while still in high school… and made his first million before turning 30. Here are five more of his energy picks.
Today’s Investment U Crib Sheet – Investing Lesson #3: Don’t Fight the Fed
- Since the Great Depression, history is on the side of the Fed in stabilizing the economy during a monetary crisis, whether it be the 1987 stock market crash, the 1997 Asian currency crisis, or the 9/11 terrorist attacks. The Fed learned a hard lesson in December 1930, when it failed to bail out the official-sounding Bank of the United States… By failing to act, the Fed precipitated the Great Depression. Ever since then, it has moved quickly to step in and act as the true lender of last resort.
- The 2007-2008 credit crunch may take longer to work out, but the Fed is likely to stabilize the economy and the financial markets once again. However, there is no guarantee that history will repeat itself. And given that the Fed is a source of great instability (easy money – tight money cycle), it pays to hedge your bets. And that brings us to the final lesson… (See all 4 investing lessons from Dr. Mark Skousen, in Investment U issue #776, 4 Investing Lessons: How To Profit During a Financial Crisis.)
- These Two Petrochemical Companies Have Exactly What The Global Recovery Needs
- Transportation Stocks: Follow the Great Industrialists To Incredible Wealth
- Dividend-Paying Stocks: 5 Pharmaceutical “Cash Machines”
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One Response to “Recession Investing: Why It’s Still Not Time to “Time” the Market”
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March 17th, 2009 at 12:39 am
I enjoyed reading your work! GREAT post! I looked around for this… but I found you!
Anyway, would you mind if I threw up a backlink from my site to your site?
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