Prudent Speculator eyes 10 'battered' buys

by John Buckingham, editor The Prudent Speculator

We know that pullbacks, corrections and even bear markets will always be part of the equity landscape; heightened volatility is the price we pay for participating in an asset class that historically has delivered the best long-term returns.

Remember that small-company stocks have returned 12.1% and large-company stocks 9.9% per annum from 1926-2010 vs. 5.5% for long-term government bonds and 3.6% for Treasury bills.

We’ve endured plenty of scary sell-offs in the 24+ years. Just last year, for example, stocks dropped 17% between April 23 and July 2, yet the S&P 500 still finished the year with a 15% total return.

And who can forget the drama in March 2009 when the S&P 500 was in free fall, off 28% at its lowest point, only to end that tumultuous year with a 26% increase?

Yes, we know that more modest early declines gave way to horrendous selling later in 2008, but there were tremendous opportunities created in that carnage for those with a long-term time horizon.

And the same could be said when stocks sank in 1987, 1990, 1998 and 2002.

While we recognize that many are fed up with Washington, European markets have plummeted on renewed worries about the health of Spain and Italy, and U.S. economic numbers have been disappointing, it is tough not to like stocks at current valuation levels.

Incredibly, with money seeking the supposed safety of U.S. Treasuries, the yield on the benchmark 10-year is at 2.4%, while the dividend yield on the undervalued stocks held in our Buckingham Portfolio is 2.5%.

The big pullback in the price of oil is also a positive for consumers who will soon see lower prices at the pump.

Of course, we also can’t forget that the Fed is likely to remain very accommodative, historically a positive environment for equity investors.

We can’t say that the loss of the Triple-A rating is a total surprise as S&P had warned of the possibility four weeks prior.

Though we recognize that financial fundamentals don’t matter when folks are rushing for the exits, we’d argue that current equity valuations discount a much worse economic climate than what we are likely to see.

For those looking to do a little buying, we’d be partial to the names that have been battered the most since the July 7 highs.

These include (with industry group and current dividend yield):

Cooper Tire (CTB) – Automobiles & Components: 3.5%
Briggs & Stratton (BGG) – Capital Goods: 2.7%
Waste Management (WM) – Commercial Services: 4.5%
Whirlpool (WHR) – Consumer Durables & Apparel: 3.1%
Marathon Oil (MRO) – Energy: 2.4%
Protective Life (PL) – Insurance: 3.3%
Freeport McMoran Copper & Gold (FCX) – Materials: 4.1%
STMicroelectronics (STM) – Semis & Cap Equipment: 5.2%
Seagate Technology (STX) – Technology Hardware: 6.0%
Navios Maritime (NM) – Transportation: 7.0%

It certainly will not be a surprise to see the downturn extend a bit further, but we think that long-term-oriented investors should be taking advantage of the sale that Wall Street is now having.

True, it is difficult to buy when it appears that we may be among the few who are swimming upstream, but we always remember that we are acquiring ownership, albeit very small, in corporations and not simply ‘playing’ the market.

When that ownership can be had for a bigger discount, we should be more interested in buying, but we know that the stock market is about the only institution where they hold a sale and people run away!

Learn more about this financial newsletter at John Buckingham's The Prudent Speculator.