Like many of you I find that I have ended up on every email list imaginable over the years. As a result of my endless searching on the Web to read all about the markets, new books and baseball, I end up getting marketing stuff form an incredible variety of places. I rarely unsubscribe because I like to see what other folks are doing and saying around the world. Some of it has even proven valuable. Some of it is ridiculous and good for a laugh.
Last night, I received what I thought was a real laugher. One pundit was suggesting that his followers back up the truck and load up on dividend paying blue-chips while there was blood in the streets. While the broad stock market has experienced a decline during the past few weeks, there is hardly much blood in the streets right now.
Blood in the streets was evident in 1987, 1998, 2001 and 2008. When there is blood in the streets, we hear talk every day of late-day margin related selling, and a few of the more aggressive hedge funds blow up and close their doors. We see panic on the TV and the New York Post front page has pictures of distraught traders with their heads in their hands. Marc Faber and Bill Fleckenstein take "I told you so" tours of the financial networks and predict more pain ahead.
Before you back up the truck and take advantage of all the supposed bargains, let's consider some actual facts. So far, the market is down a little less than 7% in the S&P 500 from the all-time highs. It's a pullback but it is more the equivalent of a stubbed toe than blood in the streets. Just 38 of the 500 stocks are down a bearish 20% or more in 2014. Only 101 of them are down 10% or more in 2014. This is hardly a panic situation -- there are no brokers on ledges or widows losing their farms.
As for backing up to buy dividend paying blue-chips right now, I would suggest holding off just a bit. These stocks are in my mind one of most overvalued segments of the market. Yield seeking money has pushed many of the large dividend players to ridiculous levels relative to earnings and future earnings power.
Consider Procter & Gamble (PG).This is a great company and the dividend yield of 3.08% is somewhat attractive in today's low-yield world. However, if we look just a little closer, we realize that we are paying more than 20x earnings for a company that will be lucky to grow at a single-digit rate. It is a great company but the price is too high to justify backing up the truck or even throwing a few shares in the glove box.
When there is blood in the streets, the big blue-chips sell at single-digit price-to-earnings (PE) ratios and yield "an accidental 5%," as Jim Cramer once described it. They trade at low levels to their asset value and many of them see their Enterprise Value to EBITDA ratios slip down into the mid-single digits. Outside of energy names, this is just not the case in the big stocks right now.
Of course, as we are in the silliness known as earnings season right now, we might soon see a bear market that gives us blood in the streets of New York and Chicago. Earnings are going to be a huge driver of stock prices over the next few weeks. The Fed will be watched very carefully for signs that global growth concerns are dragging the U.S. economy and they will keep interest at current levels for a longer period of time. Of course, there is always the possibility that geopolitical events finally spill over into stock prices and cause a serious decline. I am among the few that hope it happens not because I am short but because like Hetty Green and Mr. Womack (the pig farmer), I want to buy stocks during a real panic at ridiculous prices and then hold them for the next five to 10 years. It has not happened yet, so it is hardly time to back up the truck.
A few energy stocks have fallen to bargain levels and I have started to slowly buy stocks such as Noble (NE) and Rowan (RDC). But widespread enthusiastic buying is not yet the order of the day.