Let's be honest: For those of us who make our living or are trying to build our wealth in the markets, it has not been a great summer. Since June 1, the stock market is down about 9.5%, and the volatility has been staggering at times. Judging by today's job report and market action, it doesn't look as if it is going to get better anytime soon.
My statistically minded friends have pointed out that a weak summer is usually predictive of additional weakness in September and if today is any guide, this is going to hold true this year as well. One associate forwarded an article to me that quotes statistician and technician extraordinaire Laszlo Birinyi as stating that the average September decline following a summer market decline of greater than 5% leads to an additional 5% loss. More disturbing, according to the numbers released by his firm Birinyi and Associates, is that the last three declines after a down summer were 8%, 11% and 9%.
At times like these, I start to think about what I have dubbed the Templeton Trade. I started tracking this approach many years ago and it has worked very well. It is a version of John Templeton's famous initial foray into the markets back before World War II when the legendary investor borrowed $10,000 and bought every NYSE-listed stock trading for less than $1. I use a cut-off of $3 and search for all the stocks listed on the Big Board that currently are below that level. The results have been spectacular every time I have investigated this trade. The portfolio of 156 stocks from 2008 that I first mentioned on Real Money has almost tripled in just three years. The four stocks that I highlighted at the time have averaged better than 120% -- and that's in spite of one bankruptcy on the list.
As the market has been falling and investor disgust and distrust is rising, I decided that it would be worthwhile to see what the list looked like today. My search for NYSE stocks trading for less than $3 turned up 92 names. That's a pretty good list, although it's not as extensive as 2008's yet. As one would expect given the current global economic conditions, banks dominate the list. The shares of some of the world's largest financial institutions in troubled nations make the cut. NYSE-listed shares of European banks are well represented on the list of potential speculative bargains.
Along with the beleaguered National Bank of Greece (NBG), both Bank of Ireland (IRE) and Allied Irish Bank (AIB) are trading well below $3. All of these face a need for more capital, probable share dilution and asset writedowns and write-offs over the next few years. I view these as call options on the future of Europe to a large degree. I favor the Irish names as I think it is far more likely that Ireland is able to adhere to the strict austerity measures that will be needed for economic recovery over the next decade. The Centre for Economic and business research, a London-based consultant firm, expects Ireland to be among the first European nations to recover with 4% GDP growth next year. Wilbur Ross also thinks Ireland will once again be a Celtic Tiger and has invested in the Bank of Ireland. If you buy these shares, I would suggest you use speculative money and have a 100% stop-loss and at least a five-year time frame.
It is an interesting collection of stocks. Homebuilders are represented by Standard Pacific (SPF) and Beazer Homes (BZH). Someday homebuilding will see a return to growth and if these tow can survive until then the stocks could recover nicely. One of my favorite infrastructure stocks Mueller Water (MWA) is also on the list. The water infrastructure company is one of my favorite picks for the next decade.
It is an interesting list and worth the time to run the screen and review the list of the fallen. I think the most interesting trade for long-term speculators has to be the Irish banks, particularly the Bank of Ireland. Not to beat a dead horse, but I have never lost money investing in a Wilbur Ross-backed deal.