“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” —Benjamin Graham
Nothing like suffering through the worst month since May 2012 to quickly swing the emotional fear/greed pendulum back into the worry zone. Yes, just as investors were beginning to tiptoe back into U.S. stocks, with actively managed domestic equity mutual funds actually enjoying a few weeks of net inflows in July, temporarily halting a six-year exodus, the Dow Jones Industrials shed 4.1% on a total return basis, the S&P 500 dropped 2.9% and our benchmark Russell 3000 dipped 2.8% during August. Though it isn’t a grand consolation, our four newsletter portfolios each managed to lose less than the indexes during the month.
Of course, the market averages are still up 15% to 17% this year, after posting returns in 2012 that were well above the historical norm, yet many folks seem convinced that stocks are no longer the place to be. After all, for the week ended Aug. 22, the American Association of Individual Investors Bull/Bear Sentiment Survey found that among mom-and-pop investors, optimists numbered only 29.0% and pessimists totaled 42.9%, compared to historical averages of 39.0% for the former and 30.5% for the latter. And the latest Investors Intelligence reading on investment advisor/newsletter sentiment showed that the percentage of those who are expecting a correction jumped 10 points to 38.1%, near several peaks seen over the past four years that have preceded sizable market advances.
Keeping in mind Warren Buffett’s admonishment to be greedy when others are fearful and fearful when others are greedy, we are quite pleased that sentiment gauges are showing elevated levels of concern. The latest numbers on Exchange Traded Fund (ETF) flows for the month of August also warmed our contrarian hearts. The Wall Street Journal, citing data from Blackrock, reported that with just one day left in the month, $16.1 billion flowed out of U.S. ETFs in August, the worst domestic showing since January 2010. Certainly, some of those outflows were related to fixed income ETFs, but the lion’s share (a net $13 billion) was withdrawn from the widely held SPDR S&P 500 (SPY) equity ETF.
No doubt, it’s not as if there’s no cause for concern, given escalating tensions in the Middle East, with unknowable consequences whether or not the U.S. undertakes military action in Syria. And we can’t ignore the looming tapering of the Federal Reserve’s $85 billion monthly bond-buying program, anticipation of which has already led to a major increase in interest rates as the yield on the 10-year U.S. Treasury has jumped from 1.6% four months ago to more than 2.8% today. Further, the calendar has just turned to the weakest time of the year, as September and October are the only two months where stocks historically have endured negative average returns.
While we can provide no assurance that these or other factors won’t lead to a larger pullback than that seen in August, we know that there have always been reasons for worry, yet stocks have shown average annualized rates of return of 9.8% to 11.9% from 1926-2012, according to data from Morningstar. Certainly, we think investors need to be more selective these days as the merits of active management (versus passive index approaches) over the past 12 months have been quite evident, but we retain our long-term optimism for the markets in general and our broadly diversified portfolios of undervalued stocks in particular.
Corporate profits and balance sheets are healthy, dividend yields are attractive relative to potential income generated on competing investments, equity valuations are reasonable, especially in the context of a still-very-low interest-rate environment, and central bankers around the world are likely to remain accommodative, given subdued economic growth projections, despite a few positive stats out recently. And for those thinking about sitting out the next two months, we note that the Labor Day-Halloween period has been positive each of the last four years!
Today’s post was an excerpt from September’s edition of Al Frank Asset Management’s top-ranked investment newsletter The Prudent Speculator, of which I am the editor. We would be pleased to offer you a complimentary, 90-day junior subscription as a trial, if you are interested in hearing more of our ongoing thoughts on value investing. To give you an idea of the kinds of stocks we currently like, we’ve included our Portfolio Builder descriptions of two of our current favorites, Intel (INTC) and Walmart (WMT).
Click here if you’d like the 90-day trial!
Intel (INTC) Intel, the leading global semiconductor manufacturer, supplies advanced technology solutions for the computing industry. Its primary products include microprocessors, chipsets and motherboards. The first half of 2013 proved difficult, largely due to a weak global macroeconomic environment, soft PC demand and increasing inventories in the PC supply chain. We expect to see decreasing emphasis on the PC business, as the company shifts its core focus towards mobility and data center products. In addition to a refresh of its desktop and laptop processors, the company has released its next-generation Atom processor for mobile devices, which offers better power management and performance, a smaller form factor and support for both Windows and Android operating systems. Fortunately for Intel, and despite releasing their first iteration of the chips last year, not one competitor has been able to mimic the space-saving and energy-efficient three-dimensional transistor, nor does it seem imminent at this point. We believe that we will see continued growth in demand for advanced chips from Intel, particularly for data centers and for Ultrabook applications, both of which necessitate high performance and low power consumption. We like that Intel has a diversified revenue stream, low levels of debt, a competitive assortment of products and a 4.1% dividend yield.
Wal-Mart Stores (WMT) Wal-Mart is the world’s largest retailer with a presence in 27 countries, operating supercenters and wholesale warehouse clubs. In addition, the company is rolling out smaller store formats, including exclusive grocery stores, in an effort to penetrate historically under-represented urban areas. The company continues to gain momentum as it executes its Every Day Low Cost and Price (EDLC & EDLP) initiatives across the international segment. We believe that this unit, along with its growing e-commerce business, gives Wal-Mart attractive long-term growth opportunities. Though there are continued concerns over the potential growth rates of the domestic business, we believe that there remains a solid sales outlook, supported by a leadership team focused on such efforts as increasing the merchandise assortment at attractive price points and continuing to improve its price-match guarantee programs. With a solid balance sheet and a willingness to return capital to shareholders via buybacks and dividend increases, relatively lower-risk Wal-Mart offers a reasonable valuation and a 2.6% dividend yield.
The opinions and views expressed by John Buckingham or any other AFAM employee constitute judgment as of the date of publication and are subject to change at any point and without notice. Nothing presented herein is, or is intended to, constitute specific investment advice or marketing material. Past performance is no guarantee of future results. Any investment is subject to risk and possible loss of principal. This material is not an offer to sell a security or a solicitation or an offer to buy a security. Consult with an investment advisor.
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