This may come as a surprise to some, but we are in a bull market. At least according to Richard Russell of Dow Theory Letters. (Russell is a highly regarded analyst and theorist and has been publishing his "Letters" since 1958.)
But, if we are in a bull market, then why has investing activity in the stock markets stagnated? Russell's letter provides insight into why investors have been wary of current market conditions.
Russell writes that he is avoiding stocks at the moment because of their subpar value. For this assessment he is looking chiefly at dividend yields, which are payments made by a company to its shareholders calculated as a percentage of each share. The money is a portion of the company's profits.
"I know that the potential for great and safe profits in the stock market are created when one buys stocks when they're on the "bargain counter." When the Dow's dividends are below 3%, then historically the Dow is far away from the bargain counter," wrote Russell.
In other words, Russell prefers to invest in the 30 stocks that comprise the Dow Jones Industrial Average (.DJI) when a $100 investment would return at least $3 in dividends over a year.
Russell is also worried about the end of QE2, the Fed's Treasury-buying stimulus program, which may have been artificially fueling the stock markets over the past few quarters. He expects Treasuries to decline in price (which would increase their yields), which could slow down the economy. If the economy slows, he expects the Fed to restart stimulus, which would boost the prices of gold and other precious metals (a flight to safety).
Based on Russell's letter, we ran a screen to find stocks that might meet Russell's criteria. Here are 7 stocks that have a market cap above $300M, are undervalued to earnings growth (PEG less than 1), and have dividend yields greater than 3%. In addition, we narrowed the number of stocks to those that big money managers have been buying during the current quarter.
Do you think that the smart money has found the smart investments, given Russell's view of value? Or do you think that Russell is prudent in avoiding the markets at the moment? (Click here to access free, interactive tools to analyze these ideas.)
List sorted by net shares bought by institutional investors as a percentage of the share float.
1. Atlas Pipeline Partners
2. Brookfield Infrastructure Partners
3. Textainer Group Holdings Limited
4. Maiden Holdings
5. Kohlberg Kravis Roberts & Co.
6. IRSA Investments and Representations
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Andrew Dominguezand Alexander Crawford do not own any of the shares mentioned above. Institutional data sourced from Fidelity, all other data sourced from Finviz.
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