If investing were a religion, there is one word that causes the faithful to cringe: uncertainty. Today the market is as uncertain as ever, thanks to two situations: China's slowing economic growth and the incredibly volatile oil price. It is the perfect one- two punch that has investors questioning their every decision.
What you shouldn't question, however, is the opportunity that dislocation can provide. Clearly, the market is taking a breather from seven years of rising asset prices. But some asset prices are beginning to look a bit excessive. Potash Corp (POT), the largest fertilizer company in the world is trading at $16 and yields 10%. Clearly, a 10% common equity yield on a blue-chip-type security is a sign that Mr. Market sees no sustainability in the dividend. Time will tell. Potash is not over-levered, so if the dividend were reduced or eliminated, the $1.2 billion in cash used to fund the dividend would quickly find its way back to shareholders. As the low cost producer, Potash has advantages that others don't.
Innophos (IPHS) is a producer of specialty chemicals and ingredients that are used as critical components in things such as carbonated beverages and pharmaceuticals. Innophos doesn't produce sexy products, but rather essential ones. While the company has incurred some issues in 2015, investors need to look at the forest and not the trees. Shares that traded for $63 last year now go for $24, along with a near $2 dividend for a yield of 8%. The company has ample cash flow to cover both debt and dividend payments, but given the share price today, shareholders may benefit from dividend payments being transferred to buybacks.
Even the most "risk averse" folks out there, who don't want anything to do with stocks, may perhaps be behaving with the same type of emotional extremities as Mr. Market. Perhaps that is because many folks have forgotten what stock ownership is -- a stake in a business, and as such deserving to be held for an appropriate amount of time. If you are buying a business today that is bargain priced, you have to understand that a multi-year holding period is likely to deliver tremendous value. High-quality names like Action Alerts PLUS charity portfolio holding Wells Fargo (WFC), IBM (IBM) and others, are offering above-average long-term returns.
I don't think we are done with volatility in 2016. If that is a correct assessment, the opportunities will get even better.