Get 'Em While They're Cheap

09/21/2010 11:47 am EST

Focus: STOCKS

John Buckingham

Editor, The Prudent Speculator

John Buckingham, chief investment officer of Al Frank Asset Management, tells MoneyShow.com why investors’ extreme bearishness makes some undervalued large-cap dividend-paying stocks more attractive.

MoneyShow.com: John, investors are very confused. People don’t even know whether to buy stocks at all. You think it is a buying opportunity. Tell us what kinds of things they should be looking for at this point.

Buckingham: Well, we focus on valuations and we still think that there are attractively priced stocks. Now, not everything is on sale today: When you have a 75%-80% rebound off the March 9th lows, and then you still don’t really have the kind of economic growth or any economic growth at all, not all stocks are screaming, “Buy us.” You need to be selective.

But in our view, larger-cap names look very attractive today, and they look attractive for a variety of reasons. One is valuation. The large caps have underperformed for ten years really.

Q: Ten years?

A: The last decade was really a large-cap lost decade. The small and mid-caps did very well. So, these days, large caps are attractive from valuation prospective. They also have more stable income streams. They, generally speaking, have international operations to help offset any weakness in the US. And they often pay a dividend, and we think dividends are a very important theme right now, primarily because we are in a low-return environment.

Believe it or not, the yield on the Dow Jones Industrial Average is comparable to what the yield is on the ten-year Treasury. It has not been that way for years.

So, you buy undervalued names and you also get the dividend, [with] names like Verizon (NYSE: VZ), Lockheed Martin (NYSE: LMT), Eaton (NYSE: ETN), and Microsoft (Nasdaq: MSFT).

Q: Verizon has had problems growing, and it’s spending a lot of money on the rollout of its FIOS high-speed TV and Internet service. Microsoft, too, has plateaued: They seem to be making a lot of money, but nobody believes that they are going to be growing much over the next few years. Would you address that?

A: The growth component is only one part of how you evaluate a company. We all want our companies to grow, but we also focus on the current valuation, and the multiples on both Verizon and Microsoft are very attractive. For Microsoft, you are in the 11x P/E range, and for Verizon, you are in the 13x range. And more importantly, we think that you are going to have modest growth.

One of the catalysts we think for Verizon will ultimately be when they get the Apple (Nasdaq: AAPL) iPhone. And Verizon’s service is arguably better than what AT&T (NYSE: T) provides, and you get a 6% yield on Verizon. I mean it is somewhat like a utility stock. In a low-yield environment, you don’t necessarily need Verizon to grow dramatically, because you are not seeking tremendous capital appreciation. That dividend income is twice what you are going to get on a bond. (It closed above $32 Monday—Editor.)

Buckingham was interviewed by executive editor Howard Gold at the San Francisco Money Show in late August.

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