Why I'm Praying For A Market Pullback

Includes: AFL, EXC, IBM, XOM
by: Pey Shadzi

Disclaimer: Before you read another word, I want you to know the principles and methods reviewed and promoted in this article are unconventional and controversial by nature. The thoughts and suggestions are not for the faint of heart. Please review at your own risk.

Disclaimers aside, I said it: I'm hoping for a market pullback. I'm fully aware of the fact that many of you out there might not be applauding this idea. I'd venture to say the majority hates to hear the phrases "market correction" and "taking a breather" in any context whatsoever. I sympathize on some level but don't necessarily agree. Please allow me to explain.

In my opinion, the whole reason investors choose to risk their money in the markets is completely backward. The mantra out in the streets is "buy low, sell high," but when it comes down to it, we seem to do the exact opposite when the whole truth was sitting under our noses the entire time.

The superinvestor, Warren Buffett, said it best in his 2011 Berkshire annual letter when he stated:

Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%...the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the
day: What should a long-term shareholder, such as Berkshire, cheer for during that period? I won't keep you in suspense. We should wish for IBM's stock price to languish throughout the five years.

Did I hear that right? The great investing legend Mr. Buffett himself wants his holding to essentially go nowhere for the next five years? How can someone so smart say something so foolish? Here's the reason:

Let's do the math. If IBM's stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares.

For some of you out there, I hope this is starting to make sense. Buffett, being the quintessential contrarian, schools us into accepting the idea that as shareholders we should think not about how much money we can make in the market, rather we should consider ourselves intelligent business owners looking to capitalize on owning as much of a company as we possibly can. Sure, it's a deep concept to say the least, but one that is certainly worth exploring.

As it turns out, in this case owning shares of International Business Machines Corp. (NYSE:IBM) while underperforming the overall market and seeing stagnant stock returns for the foreseeable future allows us to be a larger part owner in the company due to share buybacks. This accomplishes the true goal of a dedicated shareholder and part owner in a company: accumulate as many shares as you can in order to own a majority stake in said company. Buffett, if you didn't already know it, is a genius in every sense of the word.

Having spent a few years perusing the market and doing my share of investing in the recent past, I'm still often astonished how looking at things from a different angle can vastly improve outcomes. In other words: try thinking outside of the box sometimes. It may just lead to some much needed positive alpha. For us value-laden dividend investors out there, the idea of companies posting stagnant returns while increasing dividends over time almost fits the same idea as Buffett so eloquently portrayed.

Having said that, here are a few companies I'd love to see see a significant pullback in order to purchase more shares and become a larger owner in the company:

1. Aflac Inforporated (NYSE:AFL). Aflac is my single largest holding and one of my favorite companies out there. After using the company's supplemental insurance service for some time and laughing at its iconic duck in commercial after commercial, I decided to look into being a shareholder. When I learned AFL is a dividend aristocrat that has been taking care of its faithful shareholders for decades, I immediately put the company on my watchlist. Aflac is currently sporting a forward P/E of 6.5, a dividend yield of 2.9% and a payout ratio of 29%. Moreover, it's a company that I'd love to see trade in the low 30s, in order to collect a better dividend yield and capitalize on being a bigger business owner with share buybacks.

2. Exelon Corporation (NYSE:EXC) is another one of my favorite holdings. Though I may be a young guy, I still love utilities for their ridiculously sensible business models and ability to generate strong cash flows. EXC is currently sporting a forward P/E of 12.5, a dividend yield of 5.5% (soon to be divided up and impacted by the CEG merger) with a payout ratio of 56%. If I received a significant windfall, I'd feel very comfortable stashing half of it away as a shareholder and part owner in EXC, in order to reinvest my dividends at these current prices, adding more shares to my arsenal. In fact, I've been purchasing up shares of this powerhouse over the last few months on dips below $39 a share, and I look forward to holding this steady company for years to come.

3. ExxonMobil (NYSE:XOM). I mean no disrespect to Mr. Buffett whatsoever, but perhaps XOM is an even better example of a company using wise buybacks than even Intel (NASDAQ:INTC). XOM is currently sporting a forward P/E of 9.5, a 2.2% dividend yield and a moderate payout ratio of 22%. XOM continues to purchase up shares of existing stock like it's going out of style. Being a shareholder, I like the idea that I'm becoming a larger and larger part owner in the company with each share repurchase. Though I will never own quite as much of XOM as much as Buffett once made claim to, my stake in the company would be much improved should XOM's share price stay stagnant over the next five years, while continuing to purchase up shares of its own stock. I could only be so lucky.

The Bottom Line

Often times, as investors, we lose sight of the reason why we're investing in the market altogether. By thinking "outside the box" like many investing greats such as Buffett often do, we may be able to better position ourselves and align our intentions with the businesses we believe have significant future value. Rather than the goal being to see immediate share appreciation of a particular stock, perhaps we should think more like an owner and ponder what might help us become independently wealthy in the future through increasing earnings and more significant ownership.

Here comes the moment of truth: Who's ready for a pullback?

Disclosure: I am long AFL, EXC, XOM.

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