I am still on alert for a larger pullback in the market. The larger picture suggests the SPX will li...
2 Strong Income Picks
06/15/2011 3:00 pm EST
By doing a little homework, investors can find stocks whose earnings and balance sheets can weather the market’s current volatility, like these two high-yield plays, says market veteran Neil George in this exclusive interview with MoneyShow.com.
I’d like to talk to you about market risk. A lot of investors getting into the market don’t often think about the risk that they’re taking, the market risk—especially when they’re buying certain stocks and bonds.
By correlation of course, the idea that an individual stock, security, or so forth means it’s going to move more in tandem with the general market. As we’ve seen over the past several days, weeks, months, etc., there’s been a real resurgence in volatility, a lot of uncertainty.
For the average investor trying to effectively build their retirement fund, it can be quite gut wrenching to look at a 2% or 3% gain or loss on any particular day’s portfolio movements. Therefore, it really behooves the average investor to start to look to move away from having sort of that direct market risk.
So when they move away from it, what do they do?
Well most people, whether they know it or not, end up with the same sort of stocks that are the big drivers of the S&P 500 or the Dow Jones.
Whether they’re buying Exxon Mobil (XOM), Bank of America (BAC), Chevron (CVX), the IBMs (IBM), the list goes on and on, they might not buy them directly—but they’ll end up buying them through other funds. Or it might be part of their pension program.
Or they might very well be buying an exchange traded fund or even an open-ended mutual fund that might not say they’re investing in the market, but they’ll end up buying those same sorts of very market-linked stocks. Therefore, they end up with the volatility we’ve seen recently—and over the past decade, virtually no major returns.
Ok, so for an investor who is getting into the market perhaps, do you have some advice for the things that they should be looking at, as far as basic analysis goes?
Well, basic analysis means you have to do more work; it’s the idea that you can’t just rely on a hot tip and so forth.
I like to look at companies and industries that have expanding markets. When you’re picking a company within an expanding marketplace, or an expanding industry, look for rising income and improving margins—in other words, decreasing unit costs—and therefore you’re going to get better profitability on the income side. Don’t look there first, not in earnings, where you can see a lot of issues that might be particular to any quarter.
Once you’ve found companies that meet that criteria, then look at the what-ifs and see a company that can sustain itself during some of the downturns. Then switch over to the balance-sheet side. Think, would you lend money to a particular company?
By looking at when their debts are coming due, when their bonds are coming due, and the probability of them being able to roll that over, it will give you more certainty to be able to ride out the longer-term volatilities.
We’re talking about stocks here, so can you give us two stocks that you think may be good buys?
I think within that mind, in the petroleum industry—which has seen a lot of volatility recently—is a company called Linn Energy (LINE).
It has very strong cash flow, and is very focused on controlling its debt. It has a very high dividend flow with a sustained growth of about 8%—and returns, since it came on to the market in 2006 and I’ve been following it and investing in it myself for so many years, in the multiple hundreds of percent. Very solid company.
Another firm is Otelco (OTT). It’s a phone company operator, and again, it’s very focused to the individual investor: controlled debt, very strong defensible cash flows, and a very high dividend yield of about 9%.
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