When I see the willy-nilly, mindless selling in Action Alerts PLUS charity portfolio holding Dow Chemical (DOW) or R.R. Donnelley (RRD) or Eaton (ETN) -- to name three credible companies with decent stories -- I think to myself: what do people really fear?
Declines like those of these three stocks are now endemic in this market.
I try had to figure out the mindset of the seller. I say to myself, is the seller of Dow, for example, trying to dodge three or four points of pain? Because if you do that, then you obviously don't care about getting a high-quality 4%- plus ¿yield -- where it will be after that decline -- in a 2%- and -change 10-year world.
Does the seller think that there's something so spectacular elsewhere in the market that it's not worth the pain of waiting for when the big Dow commodity spin closes and the buybacks kick in, something that's just a few months away? Maybe the seller spots something else, so compelling that they simply have to flee Dow to get the money to buy it? Or is it just so toxic at this moment to own a stock that doesn't go up much on good days and gets punched in the face on bad ones that they just can't take it anymore? That's usually a sign you are nearer a bottom than a top.
Or how about the printing company, R.R. Donnelley? What's so dangerous about owning shares in R.R. Donnelley at this moment? It's got gigantic cash flow -- more than enough to pay for that 6.54% yield -- and it is paying for you to wait until it divides into three companies that are worth much more than the whole. It is truly a value-creating transaction, and while you may think that the printing side of the business is a total loser, it only needs to buy Quad/Graphics (QUAD) -- its principal competitor, which is not doing well -- to make it so the company has a hammerlock on many of the big commercial printing jobs.
How onerous is that to wait for? If Quad cuts its dividend, the stock will be crushed and Donnelley can make its move. How can someone want out that badly? I can't even figure it. How can this stock be so dangerous to people that they have to get rid of it at this very moment, instead of waiting for all of the good to unfold?
Now, I know the big industrial that is Eaton has had some problems in the past. But it did deliver a quarter that was superior on the bottom line and pretty good on the top line, with the beginning of a return on capital phase that many of us have been waiting for. It wants to buy back stock and increase its already large dividend, which yields 3.68%.
But this stock trades as if we are about to have a recession. It's below where it was two years ago, even as it has taken out a ton of costs, has upped its aerospace business and is involved in plenty of non-residential and residential construction, both of which are definitely picking up. At 12x earnings, it isn't that dangerous or that bad...or at least so bad that it needs to be jettisoned.
I picked these three stocks, but I could have picked dozens of them, all good companies, all good yields, all doing fairly well, which people simply cannot tolerate owning. It's as if the whole cohort of decent stocks with good yields that have some economic risk has to be banished from portfolios wherever they might be found.
That's what makes this market so unforgiving. That's what we all feel. It always makes us feel like something else must be lurking because, given the characteristics outlined, most of the times these stocks just aren't worth selling. Because otherwise why bother to sell?
Sure, we can say "look, it's just the Fed. They raise, the market goes down, and we can get back in." Or we can say "all the earnings projections are shaky, so don't trust the low price to earnings multiples."
But if that's the case, then why raise rates? Or we can say both: things aren't getting better AND the Fed wants to raise rates and THAT's the reason why these stocks are for sale. It's the best explanation I can offer.