Will You Look Back on Today as Your Greatest Missed Opportunity?

When most people hear the phrase "missed opportunities" they tend to reflect on past events and what could have been. By nature I am forward looking, so "missed opportunities" for me is the present and the future.

At some point in the future will we look back on our actions today and refer to them as our greatest missed opportunity? There is a lot of fear today. Fuel prices have soared driving up the prices of everything that is transported. The economy is slowing and some fear that they may lose their jobs. Many are posturing themselves in a defensive stance, moving money out of equities and into cash and bonds. With that, consider the following stocks (data as of mid-day 8/27/08):

AFLAC Inc (AFL): Its average P/E and dividend yield between 1998 and 2007 was 18.8 and 0.95%, respectively. It is currently trading with a P/E of 14.8 and a dividend yield of 1.79%.

BB&T Corporation (BBT): Its average P/E and dividend yield between 1998 and 2007 was 15.8 and 3.30%, respectively. It is currently trading with a P/E of 9.1 and a dividend yield of 6.66%.

Consolidated Edison, Inc. (ED): Its average P/E and dividend yield between 1998 and 2007 was 14.5 and 5.47%, respectively. It is currently trading with a P/E of 10.0 and a dividend yield of 5.69%.

General Electric (GE): Its average P/E and dividend yield between 1998 and 2007 was 25.4 and 2.24%, respectively. It is currently trading with a P/E of 13.2 and a dividend yield of 4.39%.

Johnson & Johnson (JNJ): Its average P/E and dividend yield between 1998 and 2007 was 23.9 and 1.77%, respectively. It is currently trading with a P/E of 17.1 and a dividend yield of 2.60%.

Lowe's Companies, Inc. (LOW): Its average P/E and dividend yield between 1998 and 2007 was 22.0 and 0.37%, respectively. It is currently trading with a P/E of 14.0 and a dividend yield of 1.38%.

Sysco Corp (SYY): Its average P/E and dividend yield between 1998 and 2007 was 26.4 and 1.48%, respectively. It is currently trading with a P/E of 17.4 and a dividend yield of 2.79%.

By most measures, many blue-chip stocks are trading at a historical discount. Are you going to buy now or pay full-price or a premium price later? Unlike the perpetual going-out-of-business sale at the local furniture store, this sale will end suddenly and without warning.

Full Disclosure: Long in AFL, BBT, ED, GE, JNJ and SYY.

Comments

[billb:]

Good way of putting it. It's been a rough couple of years for value folks. I think eventually it's going to revert to mean and value will outperform. The million dollar question is when. It's easy to go back and point to a lot of missed opportunities, but I prefer to look ahead. With that said, it might be a good idea for one to dip a toe in the water if you're interested in picking up value. If it goes lower, pick up some more. Of course, I mean this in a general and highly diversified way. If you have a toe in the water and value rockets, you won't feel so bad. :)

2008 Aug 28 02:44 PM

[hernje:]

I've been taught a company's P/E ratio should reflect it's earnings growth rate, therefore, I tend to see nearly every one of the example stocks as being overvalued between 1998 and 2007; and now being somewhat fairly valued. Is the columnist suggesting we will inevitably return to the days of bloated stock prices?

2008 Aug 28 03:08 PM

[whidbey:]

I think you are correct, and I have not bought in yet, but I think dividends are an excellent indicator of how management thinks of its investors and It means better treatment. Unless of course the managers are crooks and use dividends to drag the unsuspecting in the door. Sorry I and getting a little battle wary .

2008 Aug 28 03:13 PM

[Larry House:]

Good point, hernje. These stocks are good buys only if their earnings take off. Current P/Es would suggest earnings are not expected to return to previous levels for a while.

2008 Aug 28 03:14 PM

[Tim Hiteshew:]

American Express, Wells Fargo, and Best Buy would also fall into this category right now.

2008 Aug 28 03:15 PM

[Alex Filonov:]

GE is a good buy when they announce some kind of spin-off. Current conglomerate is not sustainable. It's a great tribute to Jack Welsh, but he was the last CEO who could handle this monster. And to those who think dividend is an indicator, just take a look at financials in the end of the last year. Sometimes it's an indicator of a trap.

2008 Aug 28 05:19 PM

[Greg Weston:]

Those "average" PE ratios you list were years in which the massive baby boom generation (not just US but Western Europe, Canada and Japan) were at their peak earnings and buying stocks for their retirement. This generation is already starting to sell assets as it goes into retirement. Those born in 1946 are now 62 so many are still buying, but the number of buyers goes down and sellers goes up each and every year.

Current P/E ratios are also inflated because of an extremely pro-corporate president (2001-2008) and Congress (1995-2006).

That soon will change, and the historically high corporate profits of the 2000's will be a distant memory. For example, stronger unions will lead to more wage pressure.

2008 Aug 28 06:28 PM

[irondoor91:]

Are stocks riskier than bonds? There was a time in the long-distant past that investors thought so and that demanded to be compensated for it by pricing stocks at a yield greater than the bond yield. As recently as a year ago, stock dividend yields on the S&P were at the lowest in history. Stock mutual funds had one of the lowest % holding of cash in history. What happend since then? Stocks down 15% and dividends maybe up slightly. I doubt if mutual fund cash is up any, since the funds are having net outflows. The only thing that has kept S&P dividends somewhat up had been the financials, since they were north of 35% of the S&P weighting. Where are the financals dividends going? Down, that's where. Of course, their yields may stay up reasonably as a group since the stock prices have come way down.

For value guys, there is nothing more attractive than stock prices going down. My thinking is that you will be even happier and more eager to buy a year down the pike.

2008 Aug 28 06:42 PM

[Urbane Gori...:]

I'm halfway through "What Works on WallStreet".. A very in depth (and sleep inducing) book... So far, the numbers show that buying the 50 large companies in the S&P with the lowest P/Es and rebalancing yearly is a very effective means of building equity safely. However, that is not to say that the companies above would be included in the mix.... For example, Novartis has a considerably lower P/E than JNJ ... And it seems to have a better story as well..

jegan ;-)

2008 Aug 28 08:00 PM

[mextex:]

The question is not that the PE's are currently low, rather how did they get that high and no one questioned that!

2008 Aug 28 10:35 PM

[svosavvy:]

When the world wakes up and finds that the usa is not the only one with problems, like eu is doing now they will understand that blue chip values of today are really once in 20 year events. Long GE and ED

2008 Aug 28 11:29 PM

[mtp:]

hi- where are you getting your historical P/E & Div Yield data from? thanks!

2008 Aug 29 08:51 AM

[notsosmart:]

i worry about ED old infrastructure in nyc. it will take millions to replace.it will start soon. how long can this old(some over 100 years) system work?

2008 Aug 29 09:53 AM

[investor88:]

A respectable article based on fundamental analysis. Investment and trading is as much an art as a science. So I think there are other angles to the subject including technical analysis and cycle analysis. To each his own so long as the end result is long term sustainable success and comfort with the method.

2008 Aug 29 10:42 AM

[Inzight:]

Even Buffet's portfolio is getting hammered, value investors this is your time to pick up bargains

MAI.to is at $1 and change...earned $9 million in Q2. NET INCOME.
Associated with Xstrata and junior miner TNR Gold Corp (TNR.v), the Los Azules looks to be abig copper deposit... inferred resources soon.

2008 Aug 29 01:33 PM

[sharksm:]

Excellent article. I've been investing for over 35 years and have always stressed dividends as a requirement in my decisions. To prove the point, I currently hold 20,000 shares of MO, 20,000 shares of PM and 10,000 shares of KFT, which as of today's dividend increase pays me $80,000 a year. My point is that my cost basis for ALL is $35,000.00! I also am a long time holder of JNJ, PG, XOM and many other Blue Chip, dividend paying stocks.

2008 Aug 29 02:22 PM

[tipalia:]

can t agree more with sharksm,sounds like a smart investor to me. I repeat INVESTOR, not a day trader or some sort of a gambler running after everything that is hot at the time to invest. I also own great companies like JNJ, PG ,GE ,HD , T ,VOD, DEO ,WFC ,ACN ,PAYX ,except that they are not stocks du jour but I am sure that they will have their days, just to be patient ,disciplined. Successful investors have a plan and stick to it.

2008 Aug 29 02:45 PM

[ksmithdc:]

Interesting comments.

2008 Aug 29 03:11 PM

[sr9web:]

Greg Wston:

1) "stronger unions will lead to more wage pressure." This won't happne unless Dems win big this cycle and can squash right to work laws.
Union bloat killed the USA automakers - all other MFG's that can, will move overseas to escape the union parasite.

2) "This generation is already starting to sell assets as it goes into retirement." This is why solid divy stocks are a good choice
Retired people need income.

PS: Still short CRZ? Hod did today (8/29/08) feel? HaHaHa!

2008 Aug 30 03:44 AM

[BlueOkie:]

I own all dividend paying stocks. I buy only thru transfer agents and reinvest all dividends. Brokers only make you broker. I own BBT and JNJ and they pay all the fees except for selling.

2008 Aug 30 07:49 AM

[Lilliana:]

Yes... The rewards GREATLY outweigh the risks.
Great investments abound.
However, the sheep see nothing but doom and gloom ,with the sky falling.
The worst is over..new money is flowing into the market
However, lets get through September..always the worst month in the annual maket cycle

2008 Aug 30 11:58 AM

[bearfund:]

These companies have been around a lot longer than 10 years. Using a period containing an enormous stock bubble for comparison purposes when much longer track records are available will lead to overvaluation. A longer-term view shows that the overall market is still trading above typical multiples; the highest and lowest multiples over the past 50 years were about 7 in 1979 and about 45 in 2001. On a log scale (the appropriate measure here), we're a lot closer to the high end than the low. So if you're buying at today's still-high multiples, you are betting on either explosive growth or a return to bubble conditions. Either is possible, of course; the Fed is printing plenty of money, so another stock bubble is not out of the question, but it would seem unusual to have two bubbles in the same asset class in a single decade. As for growth, I don't really see where it's going to come from. These are US companies and some of them do not or cannot export their products (ED, for example). For those that can, the BRICs are cooling down and Europe is its usual sluggish self. Exports grew rapidly last quarter but with the dollar rising and growth abroad slowing or reversing, that trend seems unlikely to continue. About the only thing I can see driving growth in the next few years is a huge burst of government spending ("infrastructure"!) fueled by printed money. In that case, good luck guessing at the real value of your returns (and don't forget that you have to pay taxes on the inflation component).

In the longer term, a decade-long deleveraging and large-scale restructuring of the American economy, its citizens' values, and its system of government could restore the kind of conditions that would lead to solid growth and justify today's valuations. But the probability of that happening is much less than 1/37, so you would achieve a better risk/reward ratio by putting half your portfolio in T-bills and betting the rest on 23. In fact that is very much like buying stocks at today's prices: most likely you'll lose about half your investment as multiples contract toward historical bottoms, but maybe a miracle of some kind will occur and people will once again be willing to pay 25x earnings and 50x dividends for 9% nominal growth in an inflationary environment. A curious position to take, but the market welcomes all kinds. Good luck to you.

2008 Aug 30 01:45 PM

[Life Saving...:]

I am glad to say I remember when folks abandoned Intel in the early '90's due to a minor glitch in its microprocessing chip - although most systems relied on it's microchip for processing - I bought. They fixed the problem and the company boomed. I am also glad to say that despite the real estate market - I have been able to bid do properties for some value based private real estate investors along the way to work on my formulas. So to say this is a bad market, is a mater of perspective. I believe as long as value stocks continue to provide value - one should stick with it like a reliable friend.

2008 Aug 30 01:46 PM

[Gansett:]

Instead of Sysco, look at United Natural Foods (UNFI/$19.22). It's one-twentieth the size and has a better long term growth rate. Management is good and clean. It dominated the natural food space.

2008 Aug 30 06:22 PM

[E Nuff Sed:]

Will You Look Back on Today as Your Greatest Missed Opportunity?

I beleive so - companies like GE, PG and JNJ etc. are gaining strength and have strong footing in developing markets like India and China. They can leverage their innovations and brands to these huge emerging markets. You are getting "growth" at "deep value" prices. Also don't forget the dividends keep growing and stocks are an hedge against inflation.

The western countries aging demographics will be more than compensated by the rise of the east and the south.

These global companies (and others like Toyota, Novartis, Unilever) are the best and safest way to play "the world in flat" theme.

2008 Sep 01 06:05 PM