Please Hate the Stock Market

I hope you hate stocks. I really do.

I hope that 10% unemployment, a shaky housing market, and the threat of a double-dip recession makes you never want to invest in the market again. When you think of investing abroad, I hope the sovereign debt crisis worries you, and that Chinese corporate governance makes you more worried than you've been in the decades past.

In fact, considering the massive vault of economic and political woes worldwide, maybe you should just sell all your stocks and call it a day.

We'll be sitting at different tables
When it's time to choose our seat assignments, one thing is for sure, and it's that you and I will be sitting at different investing tables. I'll be the guy loving stocks, and you'll be the one parked in cash and bonds. And that's fine with me.

Because it's times like these, when there is no shortage of bad news or global uncertainty, that a contrarian investor can prove his or her prowess in the market. When Warren Buffett famously advised to "be fearful when others are greedy and greedy when others are fearful," I believe he was referring to moments such as this. Despite some ups and downs, the market has gone basically nowhere this year. Investor confidence is plummeting and by one measure now sits at its lowest point since January 2009.

The point is that the more you hate stocks, the lower prices fall. And the lower they fall, the more opportunities I have to pick up quality stocks at basement prices. In late 2008 and early 2009, savvy investors had an even more striking opportunity, and I wish I had benefited like so many others did.

Had I been a bit more confident and aggressive, I could have made a killing. Despite it being the leading distributor of DVDs and an online disruptor, fearful investors sold Netflix (Nasdaq: NFLX  ) down all the way to $19 per share. Now it has cemented its role in entertainment, and with its ability to stream movies and with Blockbuster affirmatively out of the way, Netflix shareholders are holding onto a $155 stock. Similarly, Las Vegas Sands (NYSE: LVS  ) was pummeled from a high of $138 down to $4 -- penny stock status. Sure, gambling got crushed during the recession; but with some of the best hotels and casinos in the country, and with fantastic Macau exposure, was it really ever worth $4? According to today's investors, not really, because the stock is now sitting pretty at $37.

Sure, it's easy in retrospect to cherry-pick the winners from the losers and exclaim victory for all stocks. But really my point is that had I not been so fearful, maybe I would have actually purchased some great companies at dirt cheap prices, instead of just holding onto what I already had.

Different scenario today?
Today's environment is not exactly the same as it was two years ago, but it still seems like a wonderful time for contrarian investors.

  • Stocks seem tremendously cheap relative to bonds. As the yield on 10-Year Treasuries drops to its lowest point in decades, the earnings yield of the S&P 500 remains solid.
  • Technology stocks are at their lowest valuations in more than two decades.
  • By the end of the year, U.S. non-financial companies could be holding near $2 trillion in cash. This indicates that companies have money to burn, which could trigger additional mergers and acquisitions, share buybacks, or increased dividends. Already we've seen plenty of tech companies boost their payouts, and others like Cisco are offering a dividend for the first time.

All these points indicate that today is an excellent time to add stocks to your portfolio. It doesn't, of course, mean you should go out guns-a-blazing and snatch up any old stock. What it does mean, however, is that U.S. stocks look pretty cheap, and for investors looking at blue chips, there may be many ways to gain shareholder value (through buybacks and dividends).

Let me suggest five companies that pay dividends above the 10-year Treasury's yield of 2.3%, that are trading at valuations below or close to the broad market, and that have been increasing their dividends over time, in some cases every year:

Company

Dividend Yield

Consecutive Dividend Increases

Price-to-Earnings Ratio

CenturyLink (NYSE: CTL  ) 7.3% 36 years 11.9
Exelon (NYSE: EXC  ) 4.8% 3 years 11.3
Sysco (NYSE: SYY  ) 3.5% 33 years 14.4
ExxonMobil (NYSE: XOM  ) 2.8% 27 years 12.1
General Dynamics (NYSE: GD  ) 2.7% 15 years 9.9

Source: Capital IQ, a division of Standard & Poor's; DividendInvestor.com.

Let me be clear: These are not stocks, similar to Netflix or Las Vegas Sands, that are so incredibly undervalued that an investor can expect to reap 100%-plus gains in short periods of time. They are incredibly solid investments, though; most of these stocks are trading below their five-year historical valuations and have great competitive advantages. ExxonMobil and Sysco lead their industries, while Exelon and General Dynamics sport particularly attractive valuations, and CenturyLink has carved out a niche in the rural telecom field to generate tons of cash flow. While you wait for the rest of the market to return to sanity and stop being so incredibly fearful, take comfort in these juicy dividends and let the capital appreciation begin.

Have any questions on the stocks above? Let me hear it in the comments below, or feel free to add them to Your Watchlist to get all the latest Fool news and analysis.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Jordan DiPietro owns shares of Exelon. Exelon, General Dynamics, and Sysco are Motley Fool Inside Value choices. Netflix is a Motley Fool Stock Advisor recommendation. Sysco is a Motley Fool Income Investor selection. The Fool has a bull call spread position on Cisco Systems. The Fool owns shares of Exelon, ExxonMobil, and Sysco. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (101)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 08, 2010, at 1:43 PM, polywog1 wrote:

    WB was lucky. In his early yrs. he took a criminally imprudent bet everyone's ranch on GEICO and was lucky. Based on this spec. and his carefully cultivated gura image he was pemitted to be a true investor. (For you idiots, his Board did not compare monthly performance to everything imaginable.) As he gained power and control over the yrs., he was able to extract terms, etc. from companies that other investors could not obtain. In summary, wildly imprudent concentration, a carefully groomed image, a compliant Board interested in true l.t. value and his growing control led to his Foundations the family will control for God only knows how long. A smart man but in reality, way less than the clowns in the mainstream media would lead you to believe.

  • Report this Comment On October 08, 2010, at 1:47 PM, dragonLZ wrote:

    Btw., Las Vegas Sands was crushed down to $2...

  • Report this Comment On October 08, 2010, at 2:18 PM, spokanimal wrote:

    Bravo, Jordan... first time I've hit the "recommend" button on a MF piece in over a YEAR. You're TALKING like a contrarian... now if you can just invest like one, then you're set.

    One way I express contrarianism is to say that if you're "comfortable" with your investment, you're probably screwing up. Good, contrarian investing means you have to be "uncomfortable" about acting contrary to what others are spewing... to be investing on "potential" instead of solid, trailing fundamentals... especially if a credit rating is low (Las Vegas Sands) or people think your technology is going to lose out (WiMax VS LTE) instead of focusing on a boatload of spectrum and what that means (Clearwire has 70% more spectrum than any other carrier). Jordan... there's a REASON why Buffett bought Goldman in the middle of the market crash... aspiring investors need to know that it ISN'T COMFORTABLE to be Warren Buffett.

    So, to address your opening sentence: What's good about 10% un-employment? Labor competition, that's what! If labor rates are "bid down"... it's not just good for the abiltiy of US companies to compete with Chinese companies, it also keeps inflation down and the fed off the backs of this market... maybe for a couple more years...

    ... that's a good investment climate.

    Now if we can just get one or 2 Obama policies that AREN'T anti-business......

    Spok

  • Report this Comment On October 08, 2010, at 2:54 PM, TMFPhillyDot wrote:

    @spokanimal,

    Thanks for the rec +1. I appreciate the feedback. And I agree -- it's much easier to talk like a contrarian than to invest like one. A few months ago I purchased a Spanish stock that I loved; in a short month it went down almost 20%. It would have been easier to bail out and call it a loss, but instead I bought more shares b/c I knew my thesis was still intact. Like you said, easier said than done, but it is something I try and re-teach myself all the time.

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On October 08, 2010, at 4:04 PM, onemember80 wrote:

    Jordan...although being a contrarian can be a prudent investment path in some situations, I am not sure this is one of them. Warren Buffett's quote - "Be fearful when others are greedy and greedy when others are fearful" is great one but not when the market is overbought - as it is today. Valuations are nowhere near their early 2009 lows so the contrarian approach doesn't carry much merit at this moment.

    If the market begins to drop into a second dip and we get close to the 2009 lows, your post will increasingly make more sense.

  • Report this Comment On October 08, 2010, at 4:23 PM, BillyTG wrote:

    Good call, but your analysis sounds overly simple.

    The market has been propped up largely because of the Fed. In other words, the DOW is at 11,000 today artificially. Volume is low in general, lots of cash on the sidelines.

    Stocks are safer than cash if for no other reason than the stock market might continue to increase along with inflation as long as the Fed keeps boosting it. If you're in cash, you're screwed.

    If you really want to talk contrarian, consider getting out of the stock market altogether, loading up on gold, stockpiling rice and other foods, buying an off-the-grid, sustainable farm or ranch in the mountains, and living happily ever after.

  • Report this Comment On October 08, 2010, at 4:44 PM, goalie37 wrote:

    I think the key to being a contrarian is to have a well thought out plan and stick to it regardless of what Mr. Market is saying. Simply zigging while others zag is not enough.

  • Report this Comment On October 08, 2010, at 5:02 PM, ScottyB85 wrote:

    Dollar cost averaging shines in times like these. Keep buying quality stocks on the way down and you may eek out a small return even as the market continues to move sideways. Dividend yields also get better as prices fall. Stock up!

  • Report this Comment On October 08, 2010, at 5:09 PM, PeyDaFool wrote:

    onemember80,

    You may very well be right in your prediction that the market is overbought. If this is the case, it would be safer to be on the sidelines, watching and waiting for another correction. On the other hand, you could be completely wrong and the market could continue to climb slowly for the next ten years and, consequently, you would miss out on huge profits as the stock market rebounds and continues to make strides.

    The contrarian approach of buying stock certainly contains merit in any economic time. However, the hardest part of being a contrarian is deciding when a stock is beat down unnecessarily or when a stock is mistakenly undervalued.

  • Report this Comment On October 08, 2010, at 5:56 PM, BurntTiger wrote:

    great article! I love the fact that a drip will kick butt in a flat market. its also much easier to be contrarian if you're young like me. The younger generation thinks old people are full of it anyway we are used to doing the opposite of what our elders say! Plus a long time frame lets me DCA out any mistakes.

  • Report this Comment On October 08, 2010, at 7:15 PM, totallyoblivious wrote:

    This would've been a great article had it been posted a month and a half ago. But dropping the most overused Buffet quote of all time to try and justify that people should be buying stocks right now after a month and a half rally? I'm sorry, but the market isn't fearful right now, it's greedy.

  • Report this Comment On October 08, 2010, at 7:35 PM, thunderboltnova wrote:

    Don't feel bad if you missed such a great buying opportunity during the financial crisis... I was never afraid to buy and I was buying AIG all the way down knowing it was a solid company or at least I thought at the time. Well you know the rest of the story.

  • Report this Comment On October 08, 2010, at 9:50 PM, ChrisFs wrote:

    I bought Ford at 2.7 and sold it at 12 within a year.

    I bought GE at 9 and sold around 13. Close to 50% return within a year on one of the biggest large cap companies around.

    I'll never get tired of telling people that. :)

  • Report this Comment On October 08, 2010, at 9:50 PM, ChrisFs wrote:

    I also bought GM, but soid it right after Obama announced he would let it go bankrupt.

  • Report this Comment On October 08, 2010, at 11:37 PM, mipakaco wrote:

    Actually the low for LVS was $1.38. How could you forget that? Talk about contrarian? Motley Fool are the kings of contrarians. They've been bashing LVS almost daily from the $1.38 all the way up to $37 (a 27 bagger), while they continue to pump Melco (down 15% in a year). Now THAT'S contrarian.

  • Report this Comment On October 09, 2010, at 1:58 PM, mtt04 wrote:

    Good luck to you. Instead of buying stocks with HFT's I have bought gold at stupidly cheap prices for the last 10 years and will sell to all the Elmer Fudds I can.

    However, to arrogantly say that you want people to hate stocks is a dangerous game dude.

    It'll be you against the HFT's which unfortunately means your $898 bucks in investments will get killed in a flash crash party puke.

    I'll take my physical unencumbered gold and silver over your paper crap any day.

    Good luck to you sport we'll see ya in a year. I have a feeling your arrogance will be somewhat diminished.

  • Report this Comment On October 09, 2010, at 5:26 PM, aleax wrote:

    @spokanimal,

    "if you're "comfortable" with your investment, you're probably screwing up" -- beautiful soundbyte, goes right up there on my file of quotable quotes next to "bull markets climb a wall of worry" and "bear markets slide down a slope of hope" (which are really the core motivations for being a contrarian in the first place).

    If and when everybody knows you must buy, keeping out is contrarian -- and SHOULD make you uncomfortable but WILL save you money; if and when everybody knows that stocks are a mug's game, then to be contrarian (and make money) is to buy -- and, again, if you're not worried about the "OMG I hope he doesn't get violent" worried stares you get when mentioning you're buying at cocktail parties, you're not human,

    But once you've lived through at least two or three of each of bull and bear markets, it does eventually become clear to you that going with the heard, or momentum, means losing your shirt, while "if you can keep your head when all about you // are losing theirs and blaming it on you, // if you can trust yourself when all men doubt you", THEN (while worrying yourself sick all the while) you WILL eventually bank tidy profits or savings (even once you deduct the cost of the Maalox needed to help you through;-).

  • Report this Comment On October 09, 2010, at 7:59 PM, wpr101 wrote:

    Would have been much more precisent at Dow 6,500. Now, meh.

  • Report this Comment On October 10, 2010, at 7:01 PM, HedgeAnalyst wrote:

    I am blown away by this... i think this is a joke..

  • Report this Comment On October 11, 2010, at 1:16 PM, DESERTKAT42 wrote:

    Are you kidding me? only getting 5% or less is great? No way! I happen to LOVE dividend stocks. It's like free money. I make an average of 9.5% on the ones I'm holding on to. and generally make more than their dividends during the cyclical rise and fall of their prices. if you're buying a dividend that is paying less than 6.5% you better be doing it because you can make more than that on the sell! Dear me, I sincerely hope the college he graduated from has a better math department than he represents.

  • Report this Comment On October 11, 2010, at 3:36 PM, bhogwild wrote:

    In the future, please qualify your statement that stocks are cheaper than they have been since _____________(fill in the blank timeframe). Relative to what? Actual earnings? Forecast earnings? Same thing with record cash on the books. On the other side of that ledger is record debt, albeit at a low rate. It's all relative.

  • Report this Comment On October 11, 2010, at 9:56 PM, buzzjob wrote:

    OK, Genius, even if the DOW goes to 22,000, if Obama and Co. keep producing trillions of dollar bills, and the dollar (conservatively) drops to half its' current value, will you have more real wealth, or will you just be vindicated by having held onto what you had? The longer the corporate geniuses hold on to their oodles of cash, the less it'll be worth!!!

    Get out of the stock market. Borrow unusually cheap money and buy unusually cheap commercial real estate that you can pay off quickly with an endless torrent of worthless rent dollars. THINK!!!!

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