Have you looked at your dividend portfolio accounts lately? Most likely, you’ve lost some money on paper. I sure have. The Dow crashed 1000 points one day, then rebounded, and has had a number of days where 200 or 300 point drops have occurred. It is down over 8% in one month.
What is your reaction when you see a loss in value? Most people become frightened, doubtful, panicky, and so forth. Long-term value investors become excited!
Now, I don’t mean to say that nothing bad is happening. These setbacks have occurred because around the globe, there is a lot of risk. We’ve got a massive oil spill, European debt (not to mention American debt), revolutions, and reform. There are real problems out there. For instance, a weak Euro will hurt profits for American companies that bring in a lot of revenue from Europe. Some of our investments may indeed be negatively impacted by these things, but by how much? That’s what a value investor looks for in a falling market- a discrepancy between loss of fundamental value and a loss of perceived value. If the stock price has dropped far more than the company seems to have really lost, or has the potential to lose, then there could be a buying opportunity. Although I feel for all people affected by the problems of the day, when it comes to investing, these are the times when I roll up my sleeves and get back to work.
Here are a few examples.
NPK
National Presto Industries (NPK) is my top stock holding. It was indeed the first stock analysis that I posted on this site. You can find the full NPK stock analysis here. Here was my summary from that analysis:
-National Presto Industries (NPK) is an excellent small-cap dividend growth stock.
-The annualized earnings growth rate for the past 6 years has been 26%.
-The annualized dividend growth rate for the past 6 years has been 38%.
-Current dividend yield is a whopping 6.5% despite the impressive growth.
-The company boasts a squeaky clean balance sheet- tons of cash and no debt.
-NPK’s CEO, Maryjo Cohen, owns 30% of the company, so this company is the very definition of “shareholder friendly”.
-All of this comes with a P/E of under 14.5 as of this writing.
-If you want a high-growth small-cap with unbelievable long term upside potential and a dividend yield of 6.5%, this is an excellent company look at.
-Conclusion: Attractively valued as long as it remains below or dips under $140.
So where is the stock price at today? About $100. Its P/E is around 11 or so. Its 3 month change is -18%. A few days ago, it had a single-day drop of 8%. Now, logically speaking, was the company really worth 8% less than the day before? Their first quarter report was reasonably strong a month back. Unless there is some unpublicized bad news that the market is somehow aware of, the answer is a resounding no. In addition, the company is mostly isolated from these major global issues. Last year’s dividend was 6.5%. If the stock price decreases and profitability increases, the dividend yield in early 2011 could be absolutely massive. Am I afraid that my top holding has dropped in value so significantly? Absolutely not, because it presents an opportunity for me to get a great deal on some more stock.
Of course I don’t want my top holding to become over-sized compared to the rest of my portfolio. Luckily, just about every other stock in my portfolio or on my watch list has also dropped recently, meaning that there are plenty of other good bargains out there.
CMFO
This is a fun one. It’s currently my only non-dividend individual stock holding. It’s a small Chinese company called China Marine Food Group that sells name-brand seafood snacks and energy drinks. You can see my unofficial CMFO stock analysis here.
Why is it fun? Because it’s hugely volatile. My overall portfolio strategy is to have most of my assets in solid, dividend-paying companies, and then to allocate a smaller portion of my assets into smaller stocks that have a higher potential and higher risk. These smaller stocks also happen to be volatile usually. Volatility is great to a long-term investor, because I don’t care whether the stock price increases or decreases over the short-term. When the stock drops significantly, I merely consider it worth another look to buy more.
For instance, on May 6th, the stock dropped over 5%. On May 7th, the stock rose nearly 7.5%. The next market day, which was May 10th, the stock rose again, this time by 6.5%. Then on May 11th the stock dropped by over 5%. This irrationality presents long-term investors, with investing horizons measured in years instead of days, great bargains.
BIP
Brookfield Infrastructure Partners (BIP) is another large holding of mine. You can see my analysis hereBIP stock analysis here. Over the past month, the stock price has lost about 14% of its value.
BIP has approximately one quarter of its assets in Europe. In addition, some of BIP’s finest assets are in Australia with a new tax that threatens profitability. But do these things warrant a 14% drop in value? In my opinion, no. They generate predictable cash flow with a collection of assets that are recession resistant. They couple these assets with more cyclical assets like ports and timber that provide more growth with more risk. Their distribution yield is pushing 7% now due to the lower stock price.
Words of Warning
Am I saying to go out and buy these companies today? Absolutely not. I’m saying to do your homework, and take market setbacks as blessings, not curses. Investors are wrong sometimes. In the long-run, some of my portfolio choices will be duds. That’s how it works, and that’s why diversification is important. Also, do not simply buy stock that falls in the hopes of “breaking even” or to prove yourself right. That’s a recipe for disaster. Each time I buy stock, I view it as an isolated investment.
If you do your homework, stay sane in the face of insanity, and have a long-term view, you’ll see the forest through the trees and hopefully see your wealth grow.
What is my reaction when I see a loss in value? I do what I always do. I review my asset allocation which is based on a strategic model with some tactical allocations to try and squeeze some extra performance. If I’m light somewhere based on the fall I look at the possibility of buying more. The opposite is true if I see a raise in value. I assess whether it’s time to sell.