Backsliding stocks have taken the averages back to their levels at the beginning of the year. As company earnings have continued their advance, stocks are now priced more cheaply but investor sentiment is pessimistic as investor emotion follows stock prices. Peddlers of stock newsletters and other commercial services often pander to these emotions by hawking advice including auguries like the “Hindenburg Omen” or the “Cardinal Climax.”
The “Hindenburg Omen,” named for the ill-fated dirigible because “Titanic” had already been taken, is a collection of technical indicators such as a concurrent increase in both new highs and lows that allegedly predicts a market plunge this September. So does the “Cardinal Climax,” which is based on an allegedly unusual astrological lineup of the planets.
September is historically weak in stock market history and October always revives memories of crashes in 1987 and 1929 but investors will do better if they try to resist the siren calls of these invitations to market timing, recalling the long-range record of stocks of 10.9% annually over 30-year periods.
Most of us don’t have 30 years to wait for results but yielding to current emotions in an attempt to speed things up drags returns down. Pessimism reigns now but market surges only a few years ago whetted demand for books like “Dow 36,000,” “Dow 40,000” and even “Dow 100,000.” A ladies investment club in Beardstown, Illinois sold over a million books with the book jacket showing a 23% annual return over 10 years.
Euphoria faded when a magazine discovered in 1998 that this return included the monthly dues of the ladies. An auditor found that the true return was 9%. Litigation followed, the publisher allowed swapping Beardstown books for other titles but the ladies continued their club, still buying blue chips. No one seemed to care that the auditor also found that their return over a longer period was 15%.
With pessimism high and interest rates low, the market presents investors opportunities to buy blue-chip stocks at remarkable values. Achieving above average investment returns requires a sense of patient discipline. It is not easy to persist through the roars of the panderers of easy solutions but the rewards will come.
I continue to recommend DuPont (DD-$40), which is gaining fresh attention as fires in Russia drive grain products up. In addition to its traditional coatings and chemical lines, DuPont’s fastest growing lines are in agriculture, both from seeds and crop enhancing products like insecticides. The company also is expanding into higher margin pharmaceuticals. With the economy expanding, even at a painfully slow rate, DuPont’s cyclical sectors are moving it toward $3 earnings per share this year, up from $2.03, while paying a 4% dividend.
Johnson Controls (JCI-$298) is a similar cyclical company trading at a very reasonable valuation of 14 times 2010 earnings and 12 times 2011. Yield is 2% and both its auto interior lines and environmental building management systems are doing nicely. So are the various engine lines of Cummins (CMI-$77). All these companies are benefiting from sales to the industrial sector, which continues to outpace consumer groups.
Intel (INTC-$19), with a 3% yield from a dividend raised for six straight years is unusually so valued among the technological sector. It is introducing “Light Pack” fiber optic cable technology that may replace USB and other cables. IBM (IBM-$126) with a 2% yield and 14 consecutive years of dividend increases is another winner. Disciplined, patient investing in stocks like these will always beat grasping for omens.