An 11% Yield for an Aging Bull
05/27/2011 11:00 am EST
It pays to be cautious, as we are likely moving into the end stages of the bull market...but there are solid, defensive stocks you can buy that will pay good yields in this period, says Richard Band of Profitable Investing in this exclusive interview with MoneyShow.com.
Richard, we've had a bull market going on for two years. The S&P has doubled. Other parts of the market have gone up much, much more...and you're getting a little concerned that we may be getting into the later innings of this ballgame.
Could you tell us a little more about that?
Yes. There are two reasons. One is fundamental and one is technical.
The fundamental reason is that values are getting stretched. I'm finding fewer and fewer stocks that really meet the criteria of bargains. I love to buy bargains. There aren't many bargains around right now. So that puts me on alert.
Technically, I'm concerned because I'm seeing more and more stocks—very slowly this is happening—but more and more stocks are falling by the wayside. They're not participating in the bull market.
At the beginning, 90% or more of the stocks listed on the New York Stock Exchange were in confirmed uptrends. They were above their 30-week moving averages, for example. You had good participation.
Lately it's been 75% to 80%, so a significant number of stocks are falling by the wayside. That's a sign of an aging bull.
Now, generally, we've seen, I think in this period, bull markets average about four years...something like that?
Now we're two years in, and there are people like Laszlo Birinyi, for example, and others who really think this is actually going to be a mega, mega bull market going on for quite a while.
It would certainly be wonderful if that were true, but I suspect that we're in an environment more like that of the 1930s or 1970s.
Yes, the first rally off the low there in 2002 did last for five years. That was a good long one, and it really lulled a lot of people to sleep by the end.
But the second move off of an even deeper low, the one we've had since 2009, I think it has been accompanied by much weaker fundamentals—high unemployment, very poor job creation, and financial institutions with a lot of bad loans still on their books. So this doesn't feel to me like a bull with a long lifespan ahead of it.
So what do you recommend? Do you recommend people start taking some profits? Or do you recommend that people focus and move to other areas of the market? What are you looking for people to do?
Interestingly enough, I do not recommend that people sell everything. I'm not an all in or all out type of guy. I just don’t think that kind of market timing works for most people.
In the later stages of a bull market, I think it's important to focus on defensive stocks that pay me now. Not pie in the sky. I want to be paid now, in the form of good dividends, and so I'm looking at companies like Raytheon (RTN) or Microsoft (MSFT).
Raytheon is one of the largest defense contractors, and it’s throwing off tremendous amounts of free cash flow. If you looked at the company's free cash flow, which is the cash flow after they deduct all of their capital expenditures, that stock you can buy for about 11%.
The free cash flow yields about 11% of the stock price, and that's very cheap when you consider that bonds—Treasury bonds, ten-year bonds—are yielding a little over 3%. So would you rather have 11% or 3%?
Right. One question about Raytheon, though—they’re a defense contractor, and we're going to see some cuts in the defense budget, and maybe significant ones. That may be one of the reasons they are cheap right now.
I'm sure it is. I'm sure it is one reason. People are anticipating some slowdown in defense spending, but Raytheon—very intelligently, I think, in this cycle—has been diversifying. They used to be a big missile producer, and they certainly still are. But they've been diversifying into things like cyber security.
Also border security, which is a big issue today. Not only for the USA, but for many other countries...so they're expanding their international sales. They’re not so dependent on US Department of Defense spending anymore. This is not widely known on the Street, and that's why I'm buying Raytheon.