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Time to put together a list of the 10 best stocks to buy -- after the bloodbath is over.
And that, by the way, won't be for a while. We're in the early stages of what will become a full-fledged bear market that will stretch well toward the end of 2008 and result in losses north of 20% from the October 2007 high. (See my Jan. 22 column, "5 rules for surviving a bear market.")
We've got a lot of fake-out rallies and painful plunges to go before we see the bottom of this bear, I'm afraid. It's not yet time to go on a buying spree.
So why bother putting together a list of stocks like this now? Because:
- It puts the short-term pain in perspective. It's important to remember that the long-term trend in stocks is upward. Yes, the March 2000-October 2002 bear market took the Standard & Poor's 500 Index ($INX) down 48%, but from the October low in 2002 to the October high in 2007, the S&P climbed 101%.
- It gives you a useful guide to what to sell into the rallies during an extended bear market. By creating a list of the best stocks to own, you start to identify stocks in your portfolio that are second-best and that you may have bought because you liked the upward trend in fertilizer or seed or gold or oil or luxury-goods stocks but thought that the leaders in those sectors were too high-priced. If you're able to buy the leaders because the bear has torn some of the stuffing out of them, you should certainly consider making room for them in your portfolio by selling the second-best.
- It reminds you that a bear market serves a useful function of resetting stock prices. The bear will eventually create a pricing floor that will serve as the foundation for the next bull-market rally. You want to take advantage of that reset, and a list like this shows you how.
Let me begin with that last "because," then move on to the list and talk about tactics of buying and selling.
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Stock market plunges are scary and painful. When in the early afternoon of Jan. 22 the Dow Jones Industrial Average ($INDU) had tumbled to a 212-point loss -- after falling almost 500 points in the three prior trading sessions -- I had, I'll admit, an "end of the world" thought or two. I looked at my personal portfolio in disbelief -- and pain. I was down an additional $15,000 on the day, even though I had moved the week before to almost 50% in cash.
But if you can catch your breath and get your fear under control, there is another way to look at a market plunge like this.
Coming after an extended bull market -- the most recent bull market run started in October 2002, when the Dow industrials were at 7,287 -- a bear cuts stock prices back to a level that will serve as the foundation for the next bull. I don't expect the 2008 bear will be anywhere near as ravenous as the 2000-02 bear that clawed 48% out of the S&P 500 because stock prices, as measured by price-earnings ratios, weren't as outrageous in October 2007 as they were in 2000.
- Talk back: What's your dream buy list right now?
Let's use Chevron (CVX, news, msgs), one of the performance stars of the first three quarters of 2007, as an example of how pricey the market got in 2007 and what I mean by a reset.
On Sept. 28, I sold the shares of Chevron in my Dividend Stocks for Income Investors portfolio at $93.58, which turned out to be close to the high. Oil stock P/E ratios are always low, so they're not a good guide to when an oil stock is cheap or expensive. In September, Chevron was trading at just 10.2 times projected 2008 earnings, way below the average of 17 for the stocks in the S&P 500 Index.
For the big oil companies that produce lots of cash, I often use dividend yield as an indicator of cheap versus expensive. In Chevron's case, the stock had climbed 35% in 2007, dropping the dividend yield as a percentage of the share price to 2.45%, as of Sept. 28. At the beginning of the year, the dividend yield on the stock had been close to 3.2%.
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Jubak's Journal: Market has further to fallThe Dow’s big rebound Jan. 23 appears to have been set off by computer trades: After stocks fell, large funds wound up with too much money in bonds and had to re-balance. So the wild swing was probably not a sign that the market has bottomed out, MSN Money's Jim Jubak says.
Selling when a stock gets too expensive is smart investing and will, over time, lower your risk and increase your returns if you repurchase when the price falls back into your comfort zone. Chevron isn't there yet. The price for the shares fell to $81.25 on Jan. 22, and the dividend has climbed to a more attractive 2.86%, but I've got my eye on a reset that brings the dividend yield back up to the 3.2% of 2006 or the 3.31% of 2004.
The same holds for stocks that you didn't buy because they were too expensive. That too is good discipline -- if you follow through and buy them when they fall back into your buying zone.
I remember looking at Monsanto (MON, news, msgs) shares, for example, several times toward the end of 2007 as I worked to expand the number of farm-related stocks in Jubak's Picks. Each time I decided that the shares were just too expensive. (And I didn't want to pay too much for the company's Roundup herbicide business because Roundup lost its patent protection in 2001.)
On Oct. 9, for example, at what would turn out to be the stock market's high for 2007, Monsanto shares traded at $90. With Wall Street analysts projecting earnings for the fiscal year that would end in August 2008 at $2.77 a share, that gave the stock a forward P/E ratio of 32.5. With the stock market looking riskier and riskier as the end of the year approached, that seemed too expensive.
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