It is hard not to watch the S&P 500 index or the Dow Jones Industrial Average if you own stocks. They are a barometer of the market, and your portfolio will likely be performing better when broad indexes are rising than when they are falling. But a huge temptation here is to start market timing, only putting money to work when you think the market has bottomed and will head up again. Instead of focusing on the forest, start focusing on the trees.
A hard task
Benjamin Graham, considered the father of fundamental analysis and the man who helped train Warren Buffett, used the analogy of Mr. Market when discussing investing. Mr. Market is mercurial; you never know what kind of mood he's going to be in. When he's upbeat, he'll agree to buy your stocks at high prices. When he's downbeat, he'll sell his stocks at low prices. It's a pretty good way to think about investing, since you want to buy low and sell high. But the really valuable moral of this story is probably the mercurial part, since you can't possibly know Mr. Market's mood in advance.
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Trying to market time is basically like trying to predict Mr. Market's mood. And that's where the question, "Has the market already hit bottom?" really comes from. You are, effectively, asking, "Is it safe to buy now?" There's no way to know the answer. But what's interesting is that there are investment opportunities in any market, if you look past the big indexes and start focusing on individual stocks and the businesses they represent.
One easy way to cut through the noise is to only consider companies that have long histories of increasing their dividends. Dividend Kings, with 50+ years of annual dividend hikes, would be ideal, but anything over 10 years is probably a good starting point. Since a company has to achieve business success to keep increasing its dividend, this allows you to quickly focus your attention on a smaller number of strong companies.
Digging in
Once you've slimmed down your universe of stocks, the next step is to look for historically high dividend yields. This is a way to find stocks that appear cheap relative to their own past, using yield as a rough gauge of valuation. There are almost always stocks that pop up when you do this. You may not want to own them after you dig in a little deeper, but at least you have a strong starting point to find attractive stocks.
For example, the stock market has risen dramatically from its recent lows. But Hormel Foods (HRL 0.14%) and Texas Instruments (TXN 1.27%) are offering investors historically attractive yields. To put some numbers on that, Hormel and Texas Instruments both have 2.8% yields that are near the highest levels in each company's history. Meanwhile, Hormel has increased its dividend annually for 57 consecutive years, while Texas Instruments has hiked its dividend annually for two decades and counting. Who cares what the broader market is doing -- these two companies have proven histories of success and they look like they are on sale. To be fair, both companies are facing headwinds.
Hormel's food business is struggling to pass inflation price increases on to consumers, has been suffering from the hit of avian flu, and is working to integrate a recent acquisition. None of these issues is likely to be long term, even though they are a problem in the near term. While Wall Street seems scared that Hormel has lost its way, investors that think in decades can jump aboard and collect the historically high yield.
Texas Instruments, meanwhile, operates in the cyclical semiconductor chip industry. The industry is working through a weak patch, which has put pressure on the company's top and bottom lines. However, Texas Instruments is investing in new chip plants so that it can come out of the downturn in a stronger position than when it entered it, a playbook that it has used in previous industry downturns. Notably, it makes fairly basic chips that go into everything electronic, not complex chips that are highly specific and prone to becoming obsolete. So even if it builds up some inventory during the downturn, it will likely just work it off when chip demand increases again.
There's always opportunity
When you get caught up with big-picture market moves, you risk missing all the opportunities that are hidden within. The market isn't a single entity; it is more like a sea of fish all swimming in different directions. You should stop trying to divine what all the fish will do next, on average, and start trying to find the fish that are doing something interesting.
That's three different analogies -- Mr. Market, seeing the trees that make up the forest, and a sea full of fish. With any luck, one will hit the mark with you. If not, just consider Hormel and Texas Instruments, two stocks that still seem historically cheap despite the market recovery in recent months.
