The Dow Jones Industrial Average has regained more than 6% of its loss, through Monday, but has still seen a total loss of nearly 8% over the last month. Investors have seen gains over the last week as the market tries to recover some of its loss. However, I do not believe we are out of the woods yet. I still think we will see one, maybe two, more substantial market drops within the next 4 months.
I do not believe we will experience another recession, such as 2008, but I do expect to see more losses. Some investors have forgotten how long it took for the dow jones to reach 6600 points. It did not happen over a period of weeks, it took 17 months from the markets initial downtrend to reach 6600 points on the dow jones. Below is a chart of the dow jones industrial average and its pattern from 10/12/2007 until 03/06/2009.
|10/12/07 = 14093|
|11/23/07 = 12980|
|12/07/07 = 13625|
|01/18/08 = 12099|
|02/01/08 = 12743|
|03/07/08 = 11893|
|05/02/08 = 13058|
|07/11/08 = 11100|
|08/08/08 = 11734|
|10/24/08 = 8378|
|10/31/08 = 9325|
|03/06/09 = 6626|
The recession took place over a long period of time with various periods of false hope. The market would almost always rise substantially after a big dip. However, the drops were always larger and highs were always lower. Since April, the Dow Jones has seen a similar trend with two high and two low periods, and lows were greater each time. As I said, I do not believe we are going to endure another recession, similar to 2008, but we could experience more downtrends before recovering.
I do not see another recession because the markets are much stronger than in 2008. In 2008 there was a serious financial crisis; the banks, automobile industry, and consumer spending all tanked while gas prices increased. It was a complete mess, and I do not expect a similar pattern, as areas that were weak in 2008 are now much stronger. However, we have problems such as high debt, lower credit rating, high unemployment, low consumer sentiment, etc. that could push our markets lower until the issues are resolved. Below are stocks that I consider to be safe picks for long term holds until our market begins to recover.
In a weak economy, consumers are going to shop for value and I believe the best value comes from Wal-mart (NYSE:WMT), Dollar Tree (NASDAQ:DLTR), and Dollar General (NYSE:DG). There are certain products that the consumer can not live without and these three companies offer the lowest prices and individual benefits for the purchase of stock.
Both Dollar General and Dollar Tree offer various products for a low price. Dollar General has twice as many locations and offer a larger selection of goods. Dollar Tree markets itself as five different names with all stores selling every product for only one dollar. Obviously with everything being $1, the selection is limited, you can not buy a grill but you can buy most cleaning supplies, food, and small house hold appliances.
Both stores are growing and offer a great deal of value. Each company has increased revenue and decreased the debt to assets ratio year over year since 2007. Both companies see quarterly growth on a regular basis and I believe will offer investors the perfect buying opportunity in fear of another downtrend or recession.
Walmart posted an EPS of $1.09 on August 16 a gain of 12.4%. The company has increased revenue and total assets year over year since 2007. The stock is currently trading at $51.50. In 2007 the stock dropped to a low of $43 before shooting up over $62 during the height of the recession. During economic turmoil Walmart is going to remain strong, as certain products must be purchased and the company offers low prices. The company is trading with a dividend yield of 2.84 which makes the stock a good investment during these times of uncertainty. Almost all measurable financial figures are up since 2007, therefore I could not see this stock ever reaching $43.
Aside from these bargain retail companies, I like two stocks in the beverages sector. Both The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc (NYSE:PEP) should prove to be great investments regardless of economic status. Both companies have products that are among the most popular beverages in the world. Each company has a loyal consumer base that I doubt would quit using the products regardless of the economy.
The Coca-Cola Company has a dividend yield of 2.77 and is trading $2 from its 52 week high of $69.82. The company had a record year in 2010 and is on pace to outperform during 2011. Revenue, assets, EPS all seem to improve quarter over quarter and year over year as the company has become significantly stronger since 2008. During the recession, the stock dropped from $63 to $44 but immediately began an uptrend that has now taken the price to new highs. If the economy improves, I expect this stock to rise and if the economy gets worse, I could not see the stock dropping below $55 as the financials are simply to strong.
PepsiCo, Inc saw a decline in stock price near the same time as KO, in 2008, only to rebound in the same way. The company continues to post revenue, income, and asset gains year over year which include a large gain in 2010. In 2010, year over year revenue increased by 34%, EPS by 23%, and assets by 70% which show the strength of the company. The stock has traded in a consistent range over the last two years between $60 -$71 and has a dividend yield of 3.25%.
The stock is now trading towards the low end because investors feel that growth is slowing down. I believe this stock will prove to be a good investment during uncertain times because of its improved financials and strong dividend. The stock had a monster year in 2010 and is still seeing growth, but it is near impossible to maintain the rate at which the company grew in 2010.
All five of these companies offer a service or products that are heavily used by today's consumer. If the markets were to drop, I feel that these companies are in perfect position to either trend higher or see limited loss. Dollar Tree is the only company I listed that does not pay a dividend. However, I believe this stock should rise because of its unheard of value that will continue to attract new consumers due to its low price. These companies have all drastically improved fundamentally since 2008, as have many companies. The economy has improved by a large margin since 2008 but we still have issues.
The graph of the recession in 2008 shows that the loss did not come overnight, it was a long term effect where new bottoms were always being created. It is impossible to know if more loss is coming, and in these uncertain times it is impossible to know where the bottom of a stock may fall. What we can do is compare the fundamentals along with technicals to better understand a company's strength within the economy, compared to 2008. If additional loss was to occur, I am confident that these 5 companies will provide investors with security in a market that is full of surprises.
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Disclosure: I am long DLTR.