The Glorious Return of the Individual Investor

Scared of the debt crisis in Europe, a potential slowdown of Chinese growth, stubborn unemployment numbers? I don't blame you.

In September, consumer confidence marked a multi-month low, as investors pulled billions of dollars out of equities. Individual investors like you and I were too fearful to put any money in the market.

The good news? It's only two months later, and we're back, baby. And I've got two stocks I think are great buys right now – including one that I even purchased for the portfolio that I manage.

Are we really back?
I certainly don't have a crystal ball, but I can tell you what the numbers say.

  • The S&P 500 has surged by 17% since late August, officially reaching its levels from the pre-Lehman collapse days.
  • The American Association of Individual Investors states that 48% of investors are bullish on stocks (as of last week) -- the highest level since February 2007. Bearish sentiment is at its lowest point since January 2006.
  • In August of this year, investors pulled $23 billion from U.S. equity funds. Since early September, about $8.4 billion has been poured back into those same funds, drastically changing the direction of fund flows.

Institutions aren't the only big buyers. Out of that $8.4 billion, about $2 billion (or 25%) came from retail investors. Of course, investor optimism can signal a frothy market, and there's no doubt that there are plenty of concerns and reasons to be cautious in our outlook. Still, the news suggests that now may be as good a time as any to make sure you've got money invested.

Finally, some good news
Some random event isn't causing investors to suddenly become bullish. This is no amazing and satisfactory fluke (like the Dallas Cowboys starting their season 1-7). There's good reason for all our optimism!

First, it doesn't really hurt that the Fed is willing to pump some $600 billion into the bond market in an attempt to jump-start our sluggish and wavering recovery. It also doesn't hurt that Bernanke and company plan on keeping the federal funds rate at historic lows for "an extended period." Say what you will about quantitative easing, but so far, the news hasn't hampered the recent market surge.

Second, and more importantly, the third quarter has been an absolute blowout. In the month of October, 198 companies raised their profit estimates above analyst projections, whereas only 130 cut them. This is the biggest gap since Bloomberg began keeping track in 1999.

Try this out for some context. Over the past 10 years, the average ratio of companies whose earnings beat forecasts compared to those who lagged them has been 0.59. In October, that number reached a shocking 1.5! Companies have been able to cut costs, improve productivity, and streamline operations -- and it's having a massive impact on the bottom line.

For instance, Ford (NYSE: F  ) recently announced that its third-quarter net income rose by 68%, as it increased market share and fetched higher prices for both cars and trucks. Earnings came in roughly 26% greater than what analysts expected. UPS (NYSE: UPS  ) just announced a raise to its 2010 estimate, and says it expects growth of about 52% for the year -- its largest increase since 2000. Not exactly a bad sign, considering that UPS is the world's largest package-delivery company.

And despite perceived weakness in global demand, industrial and material companies like Caterpillar (NYSE: CAT  ) and Arcelor Mittal (NYSE: MT  ) are booming as well. Caterpillar's revenue shot up by 53%. Machinery sales rose by 84%, and engine sales by 21%; ultimately, Caterpillar now says that orders are outpacing shipments.

Steel prices have taken a hit, and the industry is still in uncertain territory -- U.S. Steel (NYSE: X  ) and others have reported striking recent losses. Nonetheless, Arcelor posted impressive numbers: 48% increase in net earnings on a 30% jump in revenues. Did I mention that it walloped analyst expectations by more than 100%?

No wonder investors like us are excited --the market is finally moving!

While you shouldn't run blindly in the streets, scooping up shares of any old company, it's important to make sure you get in the game.

Take two for the road
Just because it's a bull market doesn't mean every stock will rise; after all, in a bear market, not every stock goes down. In your quest to choose wisely, let me offer two stocks to consider.

First up is Nucor (NYSE: NUE  ) , one of the most efficient and innovative steel producers in North America. Although it's tied directly to the economy, Nucor is a relatively safe bet if you're scared to get back on the investing field. With a beta of 0.89, it likely won't be wildly gyrating up and down, and it pays a great 3.8% dividend. I actually just bought shares for the real-money portfolio that I manage.

Second is Activision Blizzard (Nasdaq: ATVI  ) , the world's leading video game publisher. Activision has an ironclad balance sheet with zero debt and $2.8 billion in cash. It has a huge arsenal of franchise games to rely on, including World of Warcraft. The online multiplayer role-playing game now has way more than 10 million subscribers, and it produces incremental revenue at a time when other video game companies are struggling. In fact, that's why Activision caught the eye (and earned the recommendation) of the analysts working for the Motley Fool's Million Dollar Portfolio.

If you'd like to get more stock ideas similar to the ones above, enter your email in the box below to get "Motley Fool Top Picks & Perspectives 2011," a new free report with stock recommendations and portfolio guidance for the year ahead. We'll also tell you more about Million Dollar Portfolio, our real-money portfolio service that buys the best of our investing ideas, opening for the last time this year. To get started, just enter your email in the box below.

Jordan DiPietro owns shares of Activision Blizzard. Activision, Ford, and Nucor are Motley Fool Stock Advisor picks. UPS is a Motley Fool Income Investor recommendation. The Fool has established a bear put spread position on Caterpillar. Motley Fool Options has recommended a synthetic long position on Activision. The Fool owns shares of Activision and UPS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (36)

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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 November 10, 2010, at 4:57 PM, minnjim1 wrote:

    On the other hand, the New York Times recently wrote, "Some critics say ordinary investors are becoming wary of the stock market. In a market dominated by lightning-quick traders with immense computing power at their fingertips, the odds are stacked against them, they fear."

    I agree with the New York Times. The retail stock market investor had best be wary of the firms behaving as though markets are now their playgrounds to deploy new computer trading techniques to make themselves rich, and the rest of us be damned.

  • Report this Comment On November 10, 2010, at 5:00 PM, TMFPhillyDot wrote:

    @minnjim1,

    I definitely don't think the rest of us have to be damned! Equity flows from retail investors have gone up dramatically, and lots of prudent, patient investors are finding ways to make money. It's not get rich quick, but its the best way to secure your financial future.

    Best of luck,

    Jordan (TMFPhillyDot)

  • Report this Comment On November 10, 2010, at 5:23 PM, Murville wrote:

    "Individual investors like you and I were too fearful..." Like I? I think not.

  • Report this Comment On November 10, 2010, at 9:03 PM, TomBooker wrote:

    (snip)"In August of this year, investors pulled $23 billion from U.S. equity funds. Since early September, about $8.4 billion has been poured back into those same funds, drastically changing the direction of fund flows."(snip)

    I am with you on the evidence of corporate outlook, and also look forward to Chairman Bernanke's commitment to inflating the prices of all asset classes, with his publicly stated emphasis on the equity markets.

    I am a week or so behind mutual fund flows, but I would like to know where in the name of gawd you see a "drastic" change in the direction of US equity funds

    (The Investment Company Institute of the National Association of US Investment Companies) ICI's numbers have us in the 26th sequential week of a heightened mass exodus from US equity funds as of the end of October. Even if an influx of $2B were true, it would barely be a fraction of 1% of the retailer money which has skipped the stock market since April. That doesn't even count the substantive net-negative flow for the prior year.to last April.

    Here's the data as reported 11/3..

    http://ici.org/research/stats/flows/flows_11_03_10

    Your thesis might be better made of retail investors continuing their flight. Actually the market has done quite well since the cumulative evacuation went from historic in June, to whatever comes after historic.

    A mirror for ICI cumulative outflows and the S&P500...

    http://www.zerohedge.com/sites/default/files/images/user5/im...

    As a Charter member of The Million Dollar Portfolio, my hopes would be to give potential members straight talk, rather than a sell-side pump. It demeans the quality of the service.

    If people want to get out of their devaluing cash and net-negative returns on bonds, the MDP should be the very first place to which they turn.

    It is safe harbor to equity self-investors from times of uncertainty. The MDP Team will never let you get caught with an overpriced company.

    In upward times, they craft a better rocket ship for us.

    In many ways you learn how to be a better equity investor from Day One. Consider it "training wheels" for equity self-investing.

    At the same time it scales as much as you decide to handle. The membership works together to take advantage of fleeting opportunities within the portfolio, which the MDP Team can't attempt because of model/time encumbrances. Trading shares, options, etc, whatever your favor.

    The valuations provided by the MDP Team are our sword and shield. It is the steel stake in the ground from which all successful thinking locates.

    In the worst of times of risk and uncertainty, and monetary artifice, MDP is your body armor

    You will never again be afraid.

    I don't get paid for saying this, nor any consideration whatsoever. This is a personal mission to beat back present and future Fates, and those who have connived to cheat Our hope and road to wealth.. through fees, charges, and misdirecting noise

    The MDP was commenced at the very moment of the S&P 1500+ top. We have been to hell and back. And IMHO, there is no better self-investing vehicle ever built which can better carry the day and the average equity investor.

    My name is TomBooker, and I will be among the members to greet those who chose to become part of the first, and best, cure for the common broker.

  • Report this Comment On November 11, 2010, at 12:19 AM, TomBooker wrote:

    I should have checked my mail. I thought I might have missed the drastic reversal.

    Make that 27 sequential weeks with US equity fund outflows.

    http://www.ici.org/research/stats/flows/flows_11_10_10

    Where did you get the data for the core statistic underpinning the title of your article?

  • Report this Comment On November 11, 2010, at 8:09 AM, djemonk wrote:

    So the average investor is getting greedy, huh? I seem to remember some guy, and I don't remember his name off the top of my head, but some guy used to say "I'll teach you how to become rich. Close the door, be greedy when others are fearful and fearful when others are greedy." I'm sure I'll think of the guy's name. He's a famous investor who lives in like Kansas or something. His name sounds like a rapper, like "Warren B" or something. I'm sure it will come to me eventually, but he might be someone worth listening to.

  • Report this Comment On November 11, 2010, at 7:45 PM, xetn wrote:

    "Say what you will about quantitative easing, but so far, the news hasn't hampered the recent market surge."

    You could say the same thing about being on a 747, enjoying the ride, until you loose all the engines.

  • Report this Comment On November 15, 2010, at 9:08 PM, Rollerofthedice wrote:

    WHY do you keep recommending ATVI?!? Unless you can give us some, as yet unstated, basis for some impending breakout in the share price this stock shows NOTHING that makes me expect to make money!!!

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