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4 Ways to Play Wall Street’s Fire Sale

08/22/2011 2:05 pm EST


John Buckingham

Editor, The Prudent Speculator

Dividend stocks like Intel and Abbott Labs pay you now, during the volatile times, and have room to run when the rally resumes, says John Buckingham of The Prudent Speculator in this exclusive interview with

John, we have seen lots of volatility recently. Is that going to be the norm?

Well, we hope not. It has certainly been frightening for a lot of investors to go through periods like this.

Of course, we do need to keep in mind that in years past we have had corrections that have occurred—just in 2010, there was a 17% decline. So the recent volatility that we saw was not necessarily unusual.

What was different though was how quickly it came and the dramatic, dramatic moves up and down that we would see almost intraday but certainly day-to-day. So a lot of investors are very concerned about volatility, but if you have a long-term time horizon you would want to take advantage of that volatility.

How you can take advantage of the volatility?

Well, again, focusing on financial fundamentals is what we try to do, and when a company goes on sale you should be looking to buy. Unfortunately, Wall Street is the only place where they hold a sale and people run away.

So we do try to focus on fundamentals, and when stocks look cheap—as we think they are today—you want to be more of a buyer. If you have extra weightings now in fixed income or commodities that have appreciated, maybe you want to pull some of them back and add to your equity exposure.

When you look, talking about stocks, what "cheap" are you looking at? The P/E ratios? What are you looking at?

Well, we are looking at financial fundamentals. We are looking at:

  • P/E ratios, as you said;
  • price-to-book value;
  • price to sales;
  • and in this kind of a market, dividend yields.

That is one of the big things, I think, investors should be keying into today. You can build a nice, diversified blue-chip portfolio with a 3% yield…yet many investors are piling into ten-year Treasury bonds at yields that are much smaller than that.

So you are looking at some of the Dow components, the blue chips. Can you give me some examples?

Well, names that we like would be Intel (INTL), which has a 4% yield and a single-digit forward P/E ratio. Lockheed Martin (LMT) is not on the Dow,  but it’s another 4% yielder.

Abbott Labs (ABT), in the healthcare space, is a 4% yielder. Waste Management (WM), the garbage company, is also a 4% yielder.

There are just tremendous bargains out there—companies that in my mind are going to grow over time, and that reward us in the short run. Well there is a lot of volatility, but it can reward us in the short run with generous dividend yields.

How about these companies that are sitting on a huge amount of cash? Do you think they are going to start giving out dividends, or are they just going to use the money to buy stock back?

Well, I think the great thing today is that corporate America is lean and mean. Their balance sheets are in excellent shape. They are able to initiate and increase dividends to do share buybacks, make acquisitions, and frankly to run their businesses through periods of economic uncertainty.

So corporations are in much better shape today if we do have an economic downturn—which I am not predicting that we are going to have a recession—but if we did, they are in much better shape today than they were in 2007 and 2008.

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