As simple as “buy low, sell high” sounds, events and sentiments seem to conspire to get us to do just the opposite. Stocks are cheaper than they have been for a long time. The S&P 500 index, currently at 930 points needs to climb 18% to reach the closing price of October 30, 1998. Yet, as high as stock valuations were in 1998, people were generally very eager to buy stocks then, just as people cannot seem to get rid of stocks, or any risky assets, quickly enough now. Given the uncertainties ahead it is understandable that many investors are waiting to see clear signs of a bottom — there is nothing to keep cheap stocks from getting cheaper. However, bottoms are only visible in hindsight. For those who are fortunate enough to have some cash on the sidelines, there are some enticing opportunities for deployment.
There is no shortage of stocks that look attractive at first glance – those with low P/E ratios for instance – but at this stage in the cycle I think it is prudent to buy shares in companies with relatively little financial or operational leverage (i.e. those that can withstand some revenue declines without getting in trouble) and reasonably predictable cash flows. My plan is to start investing in the lower risk companies now and gradually buy into more cyclical companies next year as opportunities present themselves. I envision being “all in” around this time next year.
Following are a few examples of stocks with good cash position, relatively little or no debt and high dividend yields:
· Pfizer (PFE): While facing stiff competition from generics, this big pharmaceutical has a diverse portfolio of drugs and many more in its development pipeline to sustain its cash flows. With a dividend yield of 7.7% and 26 billion dollars in cash, this looks much better to me than 5-year Treasury bonds yielding 2.7%.
· Analog Devices (ADI): While this semiconductor company is not invulnerable to the looming cyclical downturn, it certainly helps to be virtually debt free and sitting on $2 billion in cash. The forward dividend yield is 4.1%.
· Chevron Corp. (CVX): Barring a prolonged weakness in commodity prices, this large, integrated oil company should perform well. With minimal debt, a strong cash position and a 4.2% forward dividend yield, Chevron is worth a consideration.
Disclosure: Author has a long position in PFE.
