This week will go down as another where the market is driven by central bankers rather than company fundamentals.
So as a stock picker, we’re stuck between feelings of frustration and opportunism.
Frustration that policy makers and central bankers can’t just get out of the way and let the free market run its course. Opportunism because we see stocks trading at bargain-basement prices.
In fact, for this month’s Australian Small-Cap Investigator, we’ve found four stocks we’d like to tip. But with only limited time to research them before our deadline, we’ll probably have to hold two of those stocks over for next month.
Most mainstream investment pros will tell you that it’s impossible to time the market. That you should just buy a bunch of blue-chip shares and hold them for life.
We believe that’s not only wrong, but that, for the most part, it’s irresponsible too.
Sure, there are some cases where that advice works. For instance, if you own a good dividend paying stock and you only expect the market to fall 10-20%.
Or if you own a portfolio of super-high-risk small-cap shares and you’re banking on them either making you huge gains or going bust.
Dividend Paying Stocks
But even with good dividend payers, a time comes when the dividend doesn’t offset big losses. A good example is the market meltdown in 2007 and 2008.
Our view is that you shouldn’t hold an expensive stock just because it pays a good dividend. If it looks expensive and there’s the chance it can’t grow the dividend, then sell…you can always buy back again when the stock is cheaper, and with any luck collect the same dividend.
But what about the argument that you bought a stock for $2 and it’s now $10, paying a 50-cent dividend? (Effectively giving you a 25% yield on your initial investment.)
That argument only stands up if you’re looking at the initial investment. But as good as it sounds, it’s not an effective use of capital…
Because the 50-cent dividend on a $10 stock is only a 5% yield. If the company can no longer grow the dividend each year, maybe you’re better off putting your money to work elsewhere. Perhaps in a stock that can grow its dividend, or even pays a higher yield.
That’s a long way of saying that you should be active with your investments rather than falling into the trap of believing that everything will be fine if you hold on.
Because if you do hold on, hoping for the best, it means you probably won’t be in a position to take advantage of good quality beaten-down stocks like the ones we’ll go through now…
These Blue-Chip Stocks Have Already Crashed
Now don’t get us wrong. Each of these blue-chip stocks has taken a beating for a good reason. But that doesn’t mean you should completely ignore them.
In fact, if you’ve taken our advice and pared back your blue-chip stock holdings in recent years, we’ve got some new advice for you. And that is to dip your toe back in the market and buy one or more of the blue-chip stocks we list below.
Again, we’re not saying you should load up your portfolio with these blue-chip shares. As Slipstream Trader Murray Dawes explains in his stock market analysis , there’s still a risk that the market could fall further.
But if you’ve got more than half of your portfolio in cash, moving part of it (say, dropping your cash position to 45-55%) into a handful of blue-chip stocks makes good sense at current prices.
‘Hang on Kris, the index has only fallen 6.83% from this time last year. I thought you said the market would crash. Have you changed your mind?’
The blue-chips we’ll suggest you consider buying have already crashed…only the index doesn’t show it yet. And maybe it never will, if the government and central bank continue to prop up the Aussie banks and big resource stocks.
Look at the table below. We’ve included the five beaten-down Aussie blue-chips that have lost between 14.9% and 48.8% in 12 months:
We know what you’re thinking. Yes, we’ve given Harvey Norman, Qantas and Myer a hard time in the past. We even suggested Money Morning readers short-sell Qantas in 2010 when it was trading at $2.53 per share.
Today it’s at $1.15.
The way we see it, none of these blue-chip stocks and businesses are perfect. And they each have their own problems, either within or outside their control. But they do have something in common…
They’re each a dominant market player in their field. And when we look at blue-chip stocks, whether it’s for growth or income, we like a stock that’s either dominant or has a fair chance of becoming dominant.
Like it or not, it’s hard for Aussie-based firms to crack the corporate ‘glass ceiling’. With so much red-tape that prevents small firms growing (we know all about that as a fan of small-cap stocks), blue-chip companies have an edge over their rivals.
Aside from that, there are individual reasons why these blue-chip stocks have fallen so much. We’ve highlighted some of them in the table above.
As we say, don’t bet the house on these blue-chip stocks. But looking for opportunities is what stock investing is all about. And if you want to be a successful investor, the best time to look for opportunities is when most other investors are fleeing the scene.
Editor, Australian Small-Cap Investigator
From the Archives…
The Problem With the Spanish Bailout
2012-06-15 – Keith Fitz-Gerald
Australian Housing – How to Avoid This Pauper’s Retirement Trap
2012-06-14 – Kris Sayce
Why Warren Buffett is Loading Up on Tungsten
2012-06-13 – Don Miller
China’s Economic Data Statistics: Just Add Salt
2012-06-12 – Dr. Alex Cowie
Why Graphite is One of the Few Places For Savvy Investors to Make Money
2012-06-11 – Dr. Alex Cowie
Powered By DT Author Box
Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.