Long-term yields for U.S. Treasuries should indeed firm but be tempered by a slowing as this phase o...
Five Stocks to Buy as Prices Drop
11/03/2009 9:15 am EST
The best time to pick up long-term winners is during a short-term correction near the beginning of an economic recovery.
The stock market is fixated on the short term. We all know that. It's an unusual occasion when stock analysts and investors look more than a few quarters ahead. That means stock prices often tend to respond to short-term news as if it were the only news.
And that means investors with long-term views of companies and economic trends can often buy likely long-term winners while they are temporarily depressed by short-term news. This kind of long-term thinking in a short-term market is one of the best ways for the average investor to beat the stock market indexes.
In pursuing that kind of strategy, however, too much caution is actually a bad thing. Let me explain—and give you some examples of stocks and sectors where taking the long view will pay off.
Don't Fear the Long Term
The past week or so has been a vivid reminder of how hard it is for investors to take the long view.
Many of us are convinced that over the next decade or more, the US dollar will decline in value, commodity prices will climb, inflation will re-emerge, gold will continue to march higher, and developing economies will outperform.
But all it took was a (so far) very modest correction—a 5% drop in the Standard & Poor's 500 Index from October 19 through October 28—to rout all those convictions.
Investors who believe, firmly, in those long-term trends sold gold, oil, and other commodities, bought dollars, and dumped developing economies. The iShares MSCI Brazil Index exchange traded fund (EWZ) fell even more steeply than the S&P 500, dropping 6.2% in the same period.
That's completely understandable.
After all, investors have suffered through two vicious bear markets in the past ten years. And the lesson of those bear markets is to sell first and ask questions later.
It also doesn't help that everyone is waiting for a correction that will take some of the exuberance out of the rally that began March 9. You just don't get 60% rallies without 10% corrections—but that is exactly what this rally has delivered. Call it too good to be true.
Now, caution is a good thing. I don't believe the economic recovery is clearly sustainable yet (see this October 29 post on the third quarter gross domestic product numbers for why not). It's certainly not the time to get reckless.
Don't Be Overly Cautious, Either
But just as you can overdo fear at market bottoms and greed at market tops—to the very real detriment of your portfolio—you can also overdo caution.
And right now, caution shouldn't be stopping you from making the kind of long-term bets that you'll need if you want to earn decent returns in the decade ahead. If, as I suspect, average annual returns are going to be lower than the long-term average for stocks of about 10%, then you need some kind of strategy for beating the market if you hope to meet your financial goals.
Most of us aren't going to get where we want to go averaging 5% a year before inflation. And while saving more is great advice, it's awfully hard for many people who are struggling to rebuild household balance sheets and seeing paychecks stagnate (at best) as costs of things like insurance and energy rise.
If you have a long-term investment trend that's as clear cut as the ones I've mentioned above, you ought to regularly fight through the temptation to be overly cautious and set up a strategy for buying low whenever you get a chance.
That's exactly what the best oil company CEOs are doing right now, for example.|pagebreak|
Think Natural Gas
Oil companies have to take the long view. Any investment decision they make today —Exxon Mobil's decision to bid for oil and gas exploration rights off Ghana, for example—isn't likely to pay off for years and years and years. That time frame for decisions makes them inherently cautious: They certainly don't want to make a decision with a payoff ten years down the road on the basis of today's fleeting enthusiasm or pessimism about oil prices. But they also know that if a company doesn't take risks today, it won't be around tomorrow.
And what are these cautious long-term risk takers investing in right now? Natural gas. They're taking advantage of the currently depressed prices for natural gas to buy into future sources of supply. In the long term, they believe, the price of natural gas will move up as a recovering global economy demands more energy. Natural gas, they also know, is a key transitional fuel for a world trying to reduce its output of carbon dioxide. It burns with less CO2 emissions than coal or oil, and it doesn't require an expensive retooling of the energy infrastructure, as wind and solar do, before it can become a major source of power.
Individual investors can make a similar long-term investment by buying shares of a low-cost US natural gas producer, such as Ultra Petroleum (NYSE: UPL), whenever the energy sector goes into one of its periodic panicked selloffs. The stock certainly has the volatility that makes this strategy work for a long-term investor. At a current price near $53 a share, Ultra sells for well below its June 2008 high of $98, but well above its 52-week low of just below $29. It traded near $45 as recently as August, and I'd certainly be interested in adding to positions when it next hits that price range.
The View Across the Pond
But I think you can get even more bang for your long-term point of view by looking to Europe's oil and gas companies. The US has pioneered the production of natural gas from shale formations in places such as Texas, Appalachia, and the Rocky Mountains. Fast-growing production from those resources is one reason for the glut of natural gas on the US market.
But Europe is just getting into the natural gas from shale business, with an effort to map potential production areas over the next six years. That's an indicator of exactly how tight a vise Europe finds itself in right now. There's plenty of natural gas available to European consumers, but supply is denominated by Russia's Gazprom (OTC: OGZPY), which has shown a disconcerting willingness to cut off supplies to Western Europe in disputes with East European nations.
That has made expanding other sources of supply a priority. That is why European companies have expanded exploration in the waters off Norway and northern Scotland and why they've stepped up exploration and production in areas of Africa, such as Algeria, where getting natural gas to Europe is relatively less expensive. I'd suggest that investors with a long-term view consider Norway's StatoilHydro (NYSE: STO) and France's Total (NYSE: TOT). (StatoilHydro was a Jubak's Pick on September 23. Read my original buy recommendation here.)
This approach will work outside the oil and gas industry, of course. Below are two more examples worth watching.
In Canada, changes to the country's tax code have created turmoil in the investment trust area. Investment trusts used to get extremely favorable tax treatment, and they were a favorite buy for income investors. Now the tax treatment is changing, and with a provision that lowers the cost of converting from investment trust status to a regular corporation, many trusts are doing just that. That has created price volatility as well as uncertainty among investors.
One stock I'd look at here is Alliance Grain Traders (OTC: AGXXF). I'm always on the lookout for stocks that let me invest in the increased global demand for food, and this company, one of the world's largest exporters of lentils, peas, and pulses, fits that trend like a pea in a pod. The company is converting from an open-ended unit trust to a dividend-paying corporation after its acquisition of Turkey's Arbel Group. The stock has traded between $7.60 and $22 a share in the past 52 weeks.
Another stock to look at is Telkom Indonesia (NYSE: TLK). This is a play on the growth of the wireless phone and data delivery markets in one of the world's most promising developing economies. Indonesia looks like it has reached a degree of political stability that will let its underperforming economy move closer to the kind of growth we're seeing in India and Brazil. The American depositary receipt (ADR) for this stock has traded between $16 and $38 a share over the past 52 weeks. I'd wait for the current enthusiasm for emerging markets to grow more temperate—as I think it will sometime in 2010—before adding this one to my portfolio.
Be patient. Good things come to those who wait. Or at least lower prices do.
At the time of publication, Jim Jubak owned shares of the following company mentioned in this column: StatoilHydro.
Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.
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