- We're seeing macro weakness, but not a significant sell-off.
- Selling into weakness is likely a mistake.
- Timing the market is a fool's errand.
- Stay the course.
This article was previously published on widemoatresearch.com
For a split second a couple of weeks ago, we began to see a bit of weakness in the markets.
The Dow Jones Industrial average fell roughly 2.4% (dropping approximately 865 points) in just a few trading sessions from August 17th-19th.
During this same period of time, the S&P 500 fell roughly 1.5% from its prior record highs.
And, due to the fact that we haven’t seen much in the way of negative volatility during the last 6 months or so, it appears that this little downdraft caught investors by surprise.
The market has made a habit of shrugging off potentially worrisome news throughout 2021. Over the last week, that trend has remained intact. Investors have largely ignored the geopolitical issues playing out in the middle east right now. The same can be said of the continued spread of the Delta variant domestically. So long as the Fed remains dovish, it appears that investors are content to push maor averages higher.
But, the volatility that we saw last week seems to have caused many investors to question whether or not it was still time to put cash to work in the markets. Heck, certain individuals that I spoke with were looking to liquidate their equity positions.
I grew up in the countryside. I still live on a small farm. Statements like that made me think, “Whoa Nelly, hold your horses!”
When I started to plan this piece, I had no idea that the market would quickly bounce back towards record highs (today, the S&P 500 hit its 51st record high of 2021, alone).
Initially, the fear that I saw from the investor base that I interact with on a daily basis served as the inspiration for this piece. I wanted to provide a sense of solace, making two primary points:
- We were still sitting within 2% of all-time highs of the S&P 500 and therefore, this “sell-off” or “dip” that we saw last week wasn’t really much of a dip at all. Sure, seeing 300+ point down days on the Dow can be frightening, especially for people who’ve been at this for awhile and can remember when 300 point down days on the Dow meant losses of several percentage points (now, a 300 point sell-off equates to a sell-off of 0.8% or so), but in the grand scheme of things, red numbers like that in today’s market environment are certainly not something that should cause investors to run towards the hills.
- Even if this sell-off turns into a more significant correction, I wanted to point out that there are still a handful of attractive investment opportunities – blue chip companies trading which offer reliable fundamental growth prospect and valuations that are well below their historical averages – which to me, represent opportunities to generate solid long-term returns, regardless of what the market is doing in the short-term from a macro perspective.
In short, once again, I wanted to take the time to highlight the timeless idea that the stock market is just that: a market of stocks. Therefore, investors should not be paying too much attention to the macro noise and worrying (speculating) about an uncertain future, but instead, to the fundamental bargains that exist in the present.
Why? Simply put, I’ll advocate for another classic market slogan, “Time in the market is more important than timing the market.”
Even at all-time highs, even with forward price-to-earnings multiples on the major averages are elevated, even when there’s doom and gloom abound, this simple statement remains true.
Timing the market is incredibly difficult – if not impossible – to do consistently over the long-term.
Sure, it would be wonderful to perfectly time market tops and bottoms, selling high, buying back low, selling high again, and repeating this process over and over until financial freedom is reached.
But, in my experience, I’ve learned that attempting such maneuvers is a fool’s errand. What is not; however, is simply buying shares of best-in-breed companies when they’re trading with attractive margins of safety and then holding them over the long-term, through ups and downs, as their fundamentals compound over time.
Here’s another one of my favorite investing quotes, from the father of value investing himself, Benjamin Graham (I’m paraphrasing here),
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
In other words, short-term sentiment (which is fickle and highly irrational) drives share prices. But, over the longer-term, a company’s underlying fundamentals will shine through this sentiment fog and shed true light on the company’s intrinsic value.
Turning back towards the current market conditions, even though we’ve seen bullish sentiment drive markets back towards new records, I believe that these high level messages are still useful to investors.
I’m certainly not going to sit here and say that individuals should not be looking over their holdings, pinpointing areas where profits should be taken.
Remember, no one ever went broke taking a profit and while, as a dividend growth investor, I tend to very rarely sell equities because doing so damages the strength of my passive income stream and its compounding potential, I think the act of trimming positions can be very useful to investors, especially if it helps them to remain in a rational state of mind that will allow them to better capitalize on opportunistic bargains in the future.
In other words, if having a few more dollars in your cash positions allows you to sleep easier at night, and will prohibit you from giving into fear if/when a significant sell-off occurs and becoming a forced seller into weakness, then that’s great.
Giving into fear and selling low, only later to be inspired be greed to buy back higher, is one of the most common pitfalls that investors fall into.
But, overall, I believe that investors – especially those in the accumulation phase of their dividend growth journey – can still be confident in their purchases because of the attractive opportunities that exist in certain areas of the dividend growth space.
For instance, in the healthcare space, there are a handful of blue chip companies trading with historically value valuations which offer strong forward looking growth prospects as well as dividend yields that are more than twice as high as the S&P 500’s.
Here are a couple of my favorites:
- AbbVie (ABBV): trades for 9.5x 2021 EPS expectations, offers 20% bottom-line growth prospects this year and another 10% in 2022, yields 4.32%, and most recently increased its dividend by 10.2%. AbbVie’s long-term average price-to-earnings ratio is 13.3x.
- Bristol-Myers Squibb (BMY): trades for 9.0x 2021 EPS expectations, offers 16% bottom-line growth prospects this year and another 8% in 2022, yields 2.90%, and most recently increased its dividend by 8.9%. Bristol-Myers’s long-term average price-to-earnings ratio is 18.8x.
I’ve seen significant weakness develop throughout the defense sector, starting in late 2020 and persisting throughout the present day, and like the healthcare stocks listed above, these companies also offer historic discounts, reliable growth prospects, strong dividends, and dividend growth prospects.
- Lockheed Martin (LMT): trades for 13.4x 2021 EPS expectations, offering 9% bottom-line growth prospects this year and another 4% in 2022, yields 2.90%, and most recently increased its dividend by 8.3%. Lockheed’s long-term average price-to-earnings ratio is 17.25x.
- Raytheon Technologies (RTX): trades for 21.0x 2021 EPS expectations, offering 49% bottom-line growth prospects this year and another 23% in 2022 (pointing towards a forward, 2022 P/E ratio of just 17.1x), yields 2.38%, and most recently increased its dividend by 7.4%. Raytheon’s long-term average price-to-earnings ratio is 17.1x.
And, if you’re not solely interested in dividend growth stocks, you don’t have to look further than one of the most popular tickers in the entire market, Amazon (AMZN), for an intriguing value in the growth space.
Amazon shares have lagged the broader markets in a major way during 2021, up just 1.5% year-to-date. However, the company has beaten analysts’ bottom-line expectations by a wide margin during its first and second quarter reports this year. The combination of share price stagnation and strong earnings growth has resulted in AMZN trading with historically low profit related multiples. And…it doesn’t appear as though the stock’s growth story is ending anytime soon with analysts calling for annual EPS growth in the 25-35% range during the next 3-5 years, pointing towards strong upside potential ahead.
Buying and holding high quality assets like this and holding them over the long-term is the simplest and easiest way to achieve success in the markets. To me, this is the message that investors should focus on – not on the short-term macro headwinds, fearful drops in the Dow, or the latest headline running across the screen on the network news.
By focusing on fundamentals, investors can avoid all of that noise and put themselves in a situation to succeed over the long-term.
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Analyst's Disclosure: I/we have a beneficial long position in the shares of ABBV, AMZN, BMY, LMT, RTX either through stock ownership, options, or other derivatives.
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