Time Is on Investors' Side

08/24/2010 10:09 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

The stock market is in short-term disarray, but big buying opportunities are emerging for long-term investors.

We had just passed a solar farm—acres and acres of solar cells pointed toward the hot Puglia sun—when we hit a traffic jam. A shepherd and his two dogs were guiding about 100 sheep down the road, and that had stopped traffic—all two cars of it.

We were on our way to lunch in Mesagne, where nothing much has happened, it seems from the architecture, since the 18th century. From there, it was on to Manduria to look at the remains of great stone walls that the Messapii had built about 700 B.C. to protect themselves from pesky Greek newcomers.

Italy makes you think in long runs of years. Here's a road that once connected Rome with Otranto, then the great eastern port of the empire, now a town where the dock area is an Italian version of Ocean City, Md. Here Domenico, our host for two weeks at the agriturismo Serra Gambetta near Bari, apologizes because his oldest olive trees—still producing—go back only 400 years. And in nearby Basilicata, cave houses built in soft cliffs for protection during the Middle Ages have been deserted by their peasant owners and are being reclaimed as shops and hotels.

The perspective is useful in today's stock market.

No, I'm not going to preach some threadbare advice about investing for the long run. Nor am I going to tout the shares of an up-and-coming asteroid miner or of a vineyard on the slopes (the lower slopes) of Olympus Mons.

But I do think it's important to think about time in relation to the current market.

Focused on the Near Future

Right now, the stock market is hung up on the short term.

Will the US economy slow significantly in the second half of 2010? Is the current slowdown in growth just a normal slump that happens during many recoveries when companies have finished rebuilding inventories that were drawn down during the recession? Is the decline in home prices near an end? Will companies start hiring by the end of the year?

Those are all important questions—if you're trying to hit quarterly performance numbers or catch the exact bottom in the market.

But they're not so important if you're investing for five years or longer.

If you're investing in that kind of time frame, what you really want to know is which economies will outperform in the long run.

You want to identify the growth industries of the next decade. You want to know where global demand is going to squeeze global supply. You want to know where the global financial power is ebbing and where it is flowing.

NEXT: Promising Stocks for the Long Term


Names for the Longer Term

You can place your bets on the answers to those questions at reasonable prices right now. Companies such as Intel (Nasdaq: INTC), Vale (NYSE: VALE), HSBC (NYSE: HBC), and Coach (NYSE: COH) are all selling at low multiples given their probable growth rates—and, especially for technology companies, even lower multiples once you subtract the big piles of cash that companies such as Intel and Cisco Systems (Nasdaq: CSCO) have in the bank.

Some of the likely emerging market leaders of the next ten years look like they will pull back to reasonable prices in the weeks ahead (China's stocks already have). Companies such as Lan Airlines (NYSE: LFL), Li & Fung (OTC: LFUGF), Cosan (NYSE: CZZ), and HDFC Bank (NYSE: HDB) aren't necessarily cheap based on current earnings, but the future frequently looks pricier than the present because it's so hard to value potential.

What you can't do at the moment is be sure that you won't be able to buy the stocks that you want in your portfolio for the long term at lower prices in two months or four or six. The fear is that after the big rally that began in March 2009 and stretched to April 2010, buying now is buying at a top. That worry has kept the market range-bound. Investors are looking for some guarantee that buying now isn't going to be like buying in December 1999, when the Nasdaq Composite Index topped out the following March.

But there are no guarantees. If the future for every promising stock were guaranteed, the shares would sell at prices much higher than today's prices.

The Raw Truth

Except that in one sector, raw materials, there is a kind of guarantee right now. We're in the middle of a surge in mergers and acquisitions in that sector of historic dimensions. For example:

  • BHP Billiton's (NYSE: BHP) bid of nearly $40 billion for Potash of Saskatchewan (NYSE: POT)
  • Vedanta Resources' (OTC: VDNRF) bid for Cairn India.
  • Korea National Oil's hostile offer of almost $3 billion for Dana Petroleum (OTC: DNPXF)

Partly this is a result of the mountain of cash that corporations have accumulated. Globally, the 1,000 largest companies are sitting on $3 trillion in cash, Bloomberg calculates. With interest rates near historic lows, all that cash is earning close to nothing.

And partly it's because an acquisition in the natural resource sector is the perfect long-term bet that avoids the current short-term uncertainty. Buy a competitor's potash mines, for example, and if fertilizer demand and prices rise as predicted, you can sit back and rake in the cash. But even if the increase in price and demand is something less than anticipated, you've eliminated a competitor that might have undercut prices. And with the acquired assets in hand, your company can avoid the risk involved in sinking capital into a new mine that might not go into production until price and demand have plunged.

So expect more buy-instead-of-build acquisitions in the sector. The combination of long-term potential and limited downside if the long term doesn't turn out to be quite as rosy as expected make this kind of deal very attractive in the sector right now.

So much so that with a big contribution from the natural resource sector, August is on track—with more than $175 billion in deals announced so far—to beat out March for the biggest merger-and-acquisition month of 2010. At the current pace, the August total could reach $285 billion. That would make August 2010 the second-busiest August on record, just behind August 2007, at $297 billion.

Of course, most of the rest of us can't pursue this strategy, because we don't own natural resource companies. (But we can invest in potential takeover candidates; these will be the subject of my column this Friday.)

Time to Buy?

The best we can do is watch the market indicators for signs that the risk of buying has ebbed to a reasonable level. And that's not yet, I'd say, with the indexes threatening to fall through resistance. We can also pick the stocks with the most long-term potential we can find when that risk level seems acceptable.

Of course, that means that when you do buy, you may still wind up taking on more risk than you'd like. There's no getting around the fact that this US economy is indeed uncertain. But there is one advantage to a market that on most days seems volatile and unpredictable: There isn't a lot of competition if you're an investor thinking long term about stocks.

At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column.

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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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