When I start feeling like there is no good reason to be in the market, and I should roll up the tent and sell out, I now know this is a signal to buy, not sell. This is how I’ve been feeling as of late. Warren Buffett says, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” So I say, why not take advantage of the value created by the current turmoil and start a position in the following stocks before the market sorts out the global debt issue and rebounds? After the economic storm clouds clear, (and they will, because they always do) you will most likely have missed the move and be buying in at much higher prices.
Doug Kass says "Stocks are now more undervalued than at the generational bottom back in 2009." The key for Kass: Growth is slowing, not stopping. He also thinks banks are about to have a La Dolce Vita moment in which they get their act together. The final ingredient, he says, is falling commodity prices - especially oil. Buying low is not an easy thing to do, I know, but if you have a long-term time horizon, you will most assuredly make money. Markets don’t stay down or up for long, or Wall Street wouldn’t make any money. The Wall Street traders thrive on volatility. Markets fluctuate on a continuum, and we are bouncing along the bottom of it right now -- ergo, it’s time to load up. The very bottom of the market, during March 2009, was the time to buy, but no one I knew was buying; everyone was running for the exits at the exact time they should have been piling in.
Many analysts are predicting a recession going forward. I don’t see it happening. How soon we forget: Just a few months ago you heard the odds of a double-dip recession were minimal, and now it is virtually assured, according to the crowd. In my experience, the crowd is usually wrong. There may be more volatility in front of us, even with the more than 10% drop in the market recently and the inevitable restructuring of Greek sovereign debt; nevertheless, this may be a good point to start a position in these buying opportunities. After the precipitous drop in the market in 2008, the high-dividend-payers were the first to recover. Why not take advantage of the value created by the current turmoil, start a position in the following stocks and collect a substantial yield as the market sorts out the global debt issue and rebounds? After the economic storm clouds clear, you will most likely have a substantial capital gain as well.
With the Fed’s recent announcement that rates will remain at ultra-low levels for at least the next two years, we can see that fixed income instruments such as bonds and CDs provide little protection against inflation, driving investors into stocks in search for yield. The Federal Reserve guaranteed super-low interest rates for two more years, an unprecedented step to arrest the alarming decline of the stock market and the economy.
The following are seven highly rated large cap or better S&P 500 stocks with great stories, positive catalysts for future growth, and pay a hefty dividend. Each of the following picks has a dividend yield of 4.0% or greater and above industry average returns on equity: American Electric Power Co., Inc. (NYSE:AEP), Consolidated Edison Inc. (NYSE:ED), PPL Corporation (NYSE:PPL), Spectra Energy Corp. (NYSE:SE), Waste Management, Inc. (NYSE:WM), Xcel Energy Inc. (NYSE:XEL) and International Paper Co. (NYSE:IP).
Return on equity (ROE) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are considered desirable.
High ROE yields no immediate benefit. Since stock prices are most strongly determined by earnings per share (EPS), you will be paying twice as much (in Price/Book terms) for a 20% ROE company as for a 10% ROE company. The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate. The benefit can also come as a dividend on common shares or as a combination of dividends and reinvestment in the company. ROE is presumably irrelevant if the earnings are not reinvested.
Moreover, some of these stocks are trading well below consensus analysts’ estimates; several have recent upgrades and positive analyst comments and positive catalysts for future growth. Below are two tables with detailed statistics regarding each company’s current summary information, earnings per share and dividend information, followed by a brief review of each company, detailed current analysts' estimates and up/downgrade activity, followed by a chart of the company's key statistics. Nonetheless, this is only the first step in finding winners for your portfolio. Please use this as a starting point for your own due diligence.
Current Summary Statistics
EPS and Dividend Detailed Statistics
American Electric Power Company, Inc. engages in the generation, transmission, and distribution of electric power. It generates electricity using coal and lignite, natural gas, nuclear, and hydroelectric energy. The company is trading below analyst estimates. American Electric Power has a median price target of $40 by 17 brokers and a high target of $46. The last up/downgrade activity was on Jun 24, 2011, when RBC Capital Markets initiated coverage on the company with an Underperform rating.
Consolidated Edison, Inc., through its subsidiaries, provides electric, gas, and steam utility services in the United States. The company is trading above analyst estimates. Consolidated Edison has a median price target of $54 by 14 brokers and a high target of $57. The last up/downgrade activity was on Jun 24, 2011, when RBC Capital Markets initiated coverage on the company with a Sector Perform rating.
PPL Corporation, an energy and utility holding company, generates and sells electricity; and delivers natural gas to approximately 5.3 million utility customers primarily in the northeastern and northwestern U.S. The company is trading on par with analyst estimates. PPL Corporation has a median price target of $30 by 13 brokers and a high target of $51.95. The last up/downgrade activity was on Jun 24, 2011, when RBC Capital Markets initiated coverage on the company with a Outperform rating.
Spectra Energy Corp, through its subsidiaries, engages in the ownership and operation of a portfolio of complementary natural gas-related energy assets in the United States and Canada. The company is trading below analyst estimates. Spectra has a median price target of $30 by 9 brokers and a high target of $32. The last up/downgrade activity was on Jun 17, 2010, when Jefferies upgraded the company from Underperform to Hold.
Waste Management, Inc., through its subsidiaries, provides waste management services to residential, commercial, industrial, and municipal customers in North America. The company is trading below analyst estimates. Waste Management has a median price target of $37 by six brokers and a high target of $43.50. The last up/downgrade activity was on Apr 29, 2011, when Wunderlich downgraded the company from Buy to Hold.
Xcel Energy Inc., through its subsidiaries, engages in the generation, purchase, transmission, distribution, and sale of electricity to residential, commercial, and industrial customers, as well as to public authorities in the United States. The company is trading on par with analyst estimates. Xcel Energy has a median price target of $25.75 by 12 brokers and a high target of $27.50. The last up/downgrade activity was on Aug 12, 2011, when Robert W. Baird upgraded the company from Neutral to Outperform.
International Paper Company operates as a paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia, and North Africa. The company is trading significantly below analyst estimates. International Paper has a median price target of $38 by 11 brokers and a high target of $48. The last up/downgrade activity was on Nov 1, 2010, when Argus upgraded the company from Hold to Buy.