When I was a little kid, there was a neighborhood bakery about a block away from my house that sold fresh bakery items and candy. In the bakery there were two glass cabinets that had candy ranging in cost from a penny for bubble gum, licorice sticks and jaw breakers to a dime for large candy bars. To raise money for trips to the candy counter, my friend and I would scour the neighborhood for glass soda bottles. At that time, you had to pay a deposit on the glass bottles and when you returned them you got your deposit back. We would go to the park and other areas looking for the carelessly tossed bottles. After hours of searching we would take our treasure to the local grocery store and collect our money. As soon as we had the money in our hands we raced to the bakery to get our candy. Obviously, some days we would have more money than others, but no matter how much we had, we always wanted to spend every cent in our hands. We would calculate how we could best maximize the candy purchase with the money we had and then spend every cent.
One day when we were at the bakery spending a lot of time trying to figure out what candy we should get, the lady behind the counter said, "Boys, you know you do not have to spend all that money today, you could save some and then when you get some more money you could come back and get something better." My friend and I looked at each other and then dismissed what she said and spent the rest of our money.
As a kid I had no patience, I did not want to wait, I wanted my candy right away. In hindsight, the bakery lady was right, rather than spend the last three pennies we had on bubble gum, we could have waited until we collected some more bottles and get a large candy bar or baseball cards instead.
I tell that story because as an adult I am only marginally better with patience than I was back then. When I have raised some money to invest, I immediately want to buy some shares. Like young Larry at the candy counter, I do not want to wait for another day when I might get something better. In the past, this lack of patience has cost me money. In early 1998 I had some money to invest and I decided that I should buy Coca-Cola (KO). My thinking at the time was that KO was a great company, had years of growth in front of it, and when the Chinese started drinking Coke their sales would really take off. It didn't matter that the stock had a P/E around 50 and was selling around 80, I wanted it right away and I bought it. Several years later I sold it at a loss for around 60. Last year, Seeking Alpha contributor, F.A.S.T. Graphs did an analysis of KO and to my amusement, they highlighted the period of time where I had purchased KO as overvalued. In early 2010, KO was selling in the low 50's and I scooped some up again and have held it ever since.
Well known investor Jeremy Grantham of GMO once wrote, "Be patient and focus on the long term. Wait for the good cards." In investing, waiting, as difficult as it is, is often the best move to make. Last year I bought Walgreen (WAG) at $29.80 after having it on a watch list for years. I liked the WAG business, I liked the macro-economic influence an aging population would have for WAG; I just wanted to buy it cheaper. I am a dividend growth investor, so my concern is income growth, but I also want to see some price gain in the stocks I own. By waiting for better entry points, I not only collect my steadily growing dividend, but I also get some capital gain.
To further show what waiting can do, I selected two widely held stocks and created charts to show their price action over a period of time. The first stock is Johnson and Johnson (JNJ) and the period of time is October through November of last year.
The pop in the JNJ stock price occurred because on October 16th JNJ reported better than expected 3rd quarter results and increased their full-year earnings forecast. This good news got everyone excited and many investors piled into the stock. However, a patient investor should have realized that the earnings beat was good news, and that the excitement would soon die-down. Had they waited, investors could have had JNJ for about 5% less than the investors who jumped in right after the good news.
The next stock is AT&T (T) which like JNJ reported better than expected earnings, in this case for the 2nd quarter. Let's take a look at the price action after the earnings report.
As you can see, it took a while, but eventually the euphoria over the better than expected earnings wore off. In addition, when AT&T reported their third quarter earnings, a slight miss in revenue helped drive the price down. Had an investor waited to buy T in November, rather than jump in after the earnings beat, they could have bought T for about 10% less.
I used two widely held stocks in my example because dividend growth investors, in general, own established companies that pay dividends. These companies are usually held by shareholders for longer periods of time than growth stocks. Because the stock is widely held by long term holders the price action, or beta, is less. Thus, I would argue the best time to buy a dividend growth stock is after a piece of temporary bad news, not after good news. The good news provides a temporary pop to the stock price that a slow growing company may not be able to sustain. Whereas bad news, that is temporary, may provide a rare opportunity to buy the stock on sale.
I have owned Exxon Mobil (XOM) for a very long time and I have no intention of selling it anytime soon. If XOM has a bad quarterly earnings report I am not selling. I believe in the long term story for XOM, I believe we will need oil and natural gas for a long time so I intend to hold XOM forever. It would take a drilling disaster or a cut to the dividend for me to sell. I imagine many holders of XOM are like me, long term holders. So if they announce some good news and some short term investors jump in to catch a quick pop, a long term investor wanting to add XOM should wait. Wait for something silly like an analyst downgrade, or slight miss on quarterly earnings. Analysts are always upgrading or downgrading stocks and are often wrong. Downgrades can take a couple dollars off a stock price and can provide a good entry point. Slight earnings misses can also provide a good entry point, as reporting earnings under expectations can drop a stock price. If the company's business is solid, a one-time earnings miss is not big news. However, if the company starts to miss every quarter, an investor needs to take a good look under the company's hood.
On the top of my watch list right now is Procter and Gamble (PG). P&G has been in business for over 175 years and is a popular stock with dividend growth investors. P&G is a dividend champion with 56 years of uninterrupted dividend increases and currently yields 3.2%. P&G has over 22 brands with over a billion dollar in sales and prominent shelf space in every store, P&G creates a huge amount of free cash which it shares with its shareholders in the form of dividends and share buy-backs. With the world population growing and with many developing markets creating a growing middle-class I believe P&G products will continue to grow for many years to come. However, I also know that as big as P&G is, growth will be relatively slow, so it is important to not overpay for the stock.
Having looked over the business and liking what I saw, I needed to determine what I would pay for it. Let's take a look at the last 6-months price action in P&G.
As you can see P&G was selling around the $60.00 mark and then made a relatively quick move to the $69.00 area. The news that activist hedge fund manager Bill Ackman took a large position in P&G is at least partially responsible for the rise in the stock price, along with an overall market move up. At a P/E of slightly over 19, I would argue P&G is a little overpriced here. In my opinion, a price around $65.00 would be a fair price and a return to $60.00 would be a major bargain.
There are several pieces of news that I believe could propel the stock price back down, including: missing earnings, Bill Ackman announcing he is selling, and/or a major political battle in March over the Debt Ceiling and spending cuts. Near the end of December the stock price fell near $67.00 over fears of the fiscal cliff, so returning to $65.00 is possible. I intend to monitor P&G and wait for the right price to buy, if it never returns to $65.00 or less, I will not buy it. There are many stocks and I have a watch list of several companies that I would be happy to buy, so if I get P&G where I want it great. If I do not, that is alright too.
All stocks, including popular dividend stocks go on sale from time to time. AT&T fell to $27.00 after they failed to buy T-Mobile. Johnson and Johnson went on sale after they announced product recall after product recall and missed earnings a couple times. Exxon went on sale after they bought XTO. As an investor you should be ready with a list of stocks whose businesses you admire and that fit your investment criteria. When those stocks go on sale, and they will, you can pick them up knowing you got a bargain.
As children we want everything now, but as we grow older we learn that we cannot have everything immediately and that at times we can benefit by waiting. In investing, patience is one of the best traits you can have. Learn to become comfortable holding some cash. Cash is not a bad thing, when the market takes one of its quick turns down, cash is a blessing. The market moves faster than it ever has, the flash crash lasted less than an afternoon, but if you had some cash that afternoon you could have picked up some tremendous bargains. If you want to be a successful investor you cannot be the little kid at the candy counter wanting everything right now, you have to have the patience to wait for the big chocolate bar on sale.