Distressed by the erratic trading sequence of stocks in recent months, Nathan Garrett has dramatically changed how he invests in the market.
Garrett, 80, a Durham, North Carolina, retiree who has invested in stocks for 40 to 50 years, said the latest meltdown on Wall Street has made him “very nervous.†He maintains that the volatile market is the second worst he has seen since stocks tumbled after the financial crisis in 2008. “I learned some lessons from 2008,†he says.
Today’s stock market activity has made him look more closely at the type of investments he should include in his portfolio–whether it’s stocks, cash, or fixed-income assets. “I want what works best for the well-being of my family,†says Garrett who has a wife, Wanda, 78, three grown children, seven grandchildren, and 10 great-grandchildren.
While he has become a more cautious investor, Garrett hunts for bargain stocks with strong long-term growth potential. Given the market’s volatile nature, his holdings have taken a wild ride. Consider, on July 24, Garrett’s investment strategy was “moderately aggressive,†and 75% of his investments were in equities, 10% savings, and 15% fixed income.
However on July 25, driven largely by stock market jitters and Congress squabbling over the debt ceiling, Garrett liquidated much of his stock and shifted his holdings to only 10% stock and 80% cash, and the remainder in fixed income.
Since then he has also changed his investment philosophy, becoming a self-professed “moderate†investor. On Aug. 10, after the debt ceiling compromise and stabilization of the market (at least for a few sessions), Garrett says he re-entered the market and boosted his stock holdings to 50% from 10% through his investment advisers, Piedmont Investment Advisors L.L.C. (No. 8 on the be asset managers list with $3.4 billion in assets under management). A sophisticated investor, the former CPA and lawyer has mostly blue chip stocks among his equity holdings, which make up 50% of his portfolio, 22% cash, and the remaining 28% in fixed-income investments. Stocks make up 40% of his portfolio’s value. “I’m very watchful with what’s going on now,†Garrett says.
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Garrett’s revised strategy–and those of hordes of individual investors–came about as equity markets were being hammered, largely dented by a combination of recent bad economic news: From Aug. 5 through Aug. 26, the Dow Jones industrial average dropped 1.40%, the Nasdaq composite index fell 2%, and the Standard & Poor’s 500 slid 1.88%, according to SNL Financial L.C., a Charlottesville, Virginia, financial services research firm. But gigantic swings of several hundred points in a short time have become the norm.
Wall Street has felt shocks from heightened fears about the sour economy, the possibility of a double-dip recession, and worries over the European debt crisis. Moreover, on Aug. 5 Standard & Poor’s slashed the United States’ credit rating to AA+ from AAA. Also in early August, the Federal Reserve pledged to keep interest rates super low for two more years making investors scratch their heads over the long-term impact of those events.
Well, expect more volatility. The market will continue to seesaw as a congressional super committee deliberates over the best way to shrink the federal deficit and the 2012 presidential contest heats up. Despite the unpredictable climate, a group of top-flight money managers says there are still some attractive places to invest your money–that’s particularly true for long-term investors willing to ride out some short-term bumps.
Stay calm and focus on long-term goals. Isaac H. Green, CEO at Piedmont Investment Advisors, says Garrett’s portfolio shifts were based on his risk tolerance and need for safety. He believes investors must realize in a turbulent market that short-term risks are magnified by market volatility. If a person has a long-term horizon, they can actually afford to not pay too much attention to market turbulence.
William H. Young, president and COO of Buford, Dickson, Harper & Sparrow Inc., a St. Louis-based portfolio management and financial services firm, agrees, urging investors not to panic: “Staying calm will keep investors from making knee-jerk decisions that they will regret when the market settles down.â€
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Eugene A. Profit, CEO of Profit Investment Management L.L.C. (No. 15 on the BE Asset Managers list with $2.07 billion in assets under management) adds it’s extremely important to understand long-term investment objectives–whether you are trying to build a nest egg or finance junior’s college education.
Stick with market leaders. Young recommends quality stocks with proven earnings track records and strong cash positions. Specifically, he recommends market leaders such as Apple Inc. (AAPL), McDonalds Corp. (MCD), FedEx Corp. (FDX), and PepsiCo Inc. (PEP). His reason: All have strong brands, solid products, and product development with consistent earnings. “These are the factors that should be considered when selecting investments,†he says.
Profit likes U.S. multinational companies with revenue streams that benefit from multiple geographic locations and offer downside protection. His firm is focusing on stocks in the technology and healthcare industries due to the need for such products and low investor expectations. He says equities that have become more attractive during the recent market activity include Google Inc. (GOOG), EMC Corp. (EMC), Aetna Inc. (AET), and Costco Wholesale Corp. (COST). “It’s a great time to buy high-quality, large, successful U.S. companies at what will be seen to be bargain prices in future years,†he says.
Look for bargains. Timothy Fidler, senior vice president, co-portfolio manager of focused-value strategies, and portfolio manager of mid-cap products for Ariel Investments L.L.C. (No. 6 on the be asset managers list with $5.5 billion in assets under management), agrees that market downturns offer some great opportunities: “If you’re a longer term investor, buying shares of very high-quality businesses at these prices will give you some attractive returns.â€
He says Lazard Ltd. (LAZ), one of the world’s largest investment banks, falls into that class. The firm advises clients on mergers, acquisitions and restructurings, as well as operates an asset management business. Fidler says that
unlike its rivals such as Goldman Sachs and JPMorgan Chase, Lazard is an independent firm without the balance sheet risks of its competitors with trading arms or mortgage portfolios. Moreover, Lazard is not being hounded by federal regulators regarding capital requirements. “What we like about the firm is that there is enormous pent-up demand for advisory services, particularly M&A, in the global economy,†says Fidler of Lazard, which at press time was trading around $26 a share from the mid $40s in May.(Continued on next page)
Another firm Fidler likes is Jones Lang LaSalle (JLL), a global real estate services firm specializing in commercial property management, leasing, and investment management services. He predicts commercial real estate will grow much faster than residential as the economy fully recovers. The stock now trades around $60 a share versus $108 three months ago.
In addition to Lazard and Jones Lang LaSalle, Fidler is attracted to CBS Corp. (CBS). Currently trading around $23 a share, CBS is a “dirt cheap†stock given it’s now growing very rapidly and well-positioned to benefit from mammoth spending during the 2012 political campaign.
“These businesses are worth substantially more than where they are trading today,†he maintains. “Their (current) value gives you a sense of how quickly the market has nosedived in the last month.â€
Seek out dividend-paying stocks. According to Piedmont’s Green, some companies have managed to significantly grow earnings over the past decade, generating free cash flow and starting to offer investors strong dividend yields. He maintains that companies with above-average dividend yields, moderate dividend payout ratios, and a history of growing the dividend are very attractive now.
Vast opportunities can be found in the consumer products world. Green points
to major packaged food and beverage companies and household products firms manufacturing goods ranging from detergent and toothpaste to soda and cheese. Many food and beverage companies, household product manufacturers, and pharmaceutical firms offer annual dividend yields of 3% or 4%, he says. “That yield is going to grow with the growth rate of those companies,†Green says. “That looks like a pretty good investment to me right now.â€(Continued on next page)
Fidler also recommends healthcare firms such as Abbott Laboratories (ABT) and Merck & Co. Inc. (MRK) paying annual dividends of 4% and 5%. His reason: The dividends of both companies are sustainable for the long term as their earnings are much higher than the dividends they pay out to investors. (See “Stocks That Pay Dividends,†this issue.)
Treasuries remain among safe investments. Greg McBride, senior financial analyst at Bankrate.com, says the weak economy will keep interest rates low, but the downgrade will raise borrowing costs for Uncle Sam, consumers, and businesses. For example, riskier borrowers may see credit card issuers increase rates, but consumers with sterling credit are unlikely to see the same impact. For home loans, the weak economy is the key determinant of where mortgage rates are, McBride says. Eventually the downgrade will result in higher mortgage rates, but not until the economy picks up some speed.
If Treasury rates keep dropping says Mary Pugh, CEO and chief investment officer of Seattle-based Pugh Capital Management, expect 15-year and 30-year mortgage rates to also fall because those rates typically move in tandem. “If we end up with a very weak economy or in a double-dip situation, we could see mortgage rates dip 25 to 50 basis points below their current levels,†she says.
From a credit quality standpoint, Pugh says Treasuries still offer a risk-free credit investment. For instance, she says a 10-year Treasury note at 2.4% might seem low, but it’s a much better return when compared to a savings or money market account.
Even with the downgrade, investors continued to flock to government bonds as safe havens in the topsy-turvy market. Experts say these securities represent the world’s most solid investment–especially with the nagging European debt crisis. No investor holding U.S. Treasuries is expected to lose principal.