Saturday, January 05, 2008

Buy Stocks When They Have the Sniffles

This is the third in a series of excerpts of a meeting I had with an investment savvy long-time friend and client.

Friend: I agree that the banks will be back and that their losses can be replaced with new capital, but it seems to me that the clouds are going to hang over them well into 2008, so in my mind there is no rush to add to them. You know I am a fan of growth. Are their any growth stocks that look cheap to you? I mean in the sense of 1994 when growth stocks were trading at about the same PE as utilities?

GCD: I see lots of stocks that are trading cheap to their growth. In fact, you can throw a dart at the Wall Street Journal and chances are you will hit a cheap stock.

T. Rowe Price, the big money manager is probably as cheap a growth stock as I am aware of.
Over the past twenty years, they have grown their dividend over 20% per year, and in the past twelve months they hiked it over 40%. They are really distancing themselves from the money management crowd, and one big reason is that nearly two-thirds of their assets are in retirement accounts. Money is just pouring into the big corporate retirement plans, and T. Rowe has focused on that area for many years.

Our Dividend Valuation Chart projects that TROW will reach close to $70 per share in the coming year. That would be over a 25% return from its present price of $55.

Friend: Again, I like the company and I like the industry, but I don't like the timing. If you buy TROW, you are betting that stocks will rise in the coming year. That is not a sure bet.

GCD: Never is, but you and I both know if you wait long enough price will intersect its dividend value.

Friend: I guess we also know that if you wait for the sun to shine and the band to play, stocks are seldom cheap. I saw that you bought TROW for me, and I was wondering what you were thinking. Glad to hear that it makes sense, unlike some of the stinkers you have bought for me over the years.

GCD: Is that a debatable point?

Friend: No, if there would have been too many stinkers, we wouldn't be talking.

GCD: I can see that you are in your usual good form. Happy New Year, and thank you for the trust you have shown me all these years.

Friend: Don't get weepy eyed on me. It's just a business meeting.

GCD: I have known a lot of people in this business, but I can count on one hand the number of people who have the faith you do in the stock market. When everyone else is wringing their hands -- like today -- you are thinking about what we ought to be buying.

Friend: The reason is simple. People come to me with all kinds of illnesses. Some are real, some imagined. In either case they feel very ill. But I know that 99% of them are going to get better. Some will need my help, or the help of another specialists, but one way or the other, if they are a reasonably healthy person, they are going to get over their illness. I don't create health, I facilitate health. The body is an amazing machine. It can handle much more than most people think. In that regard, I think the stock market is much like the body. It's a tough old bird, and there are plenty of specialists around to help it along when it gets the sniffles.

As more and more people have gotten into the investing game, it has become something resembling Las Vegas. They want to bet on anything that moves from the next elevator door to open to how much a particular stock will go up or down in a day. In the gambler's way of thinking a company that catches a cold, or heaven forbid, the flu, is a goner. I know that is not true. Indeed, I know that, in time, most companies, like most people, will get over their symptoms and go back to work. It's just a matter of time.

Thus, the reason I get interested in buying during bad times is because I know the traders are selling all companies they believe are under the weather, so to speak. Since I believe in the vast majority of cases the illnesses will pass, it just makes good sense to buy great companies when they have the sniffles. After all, when the sniffles clear up, the traders will be back to bid up their prices. It's worked for 25 years.

GCD: I'm a witness to that. Thanks again for your time.