When is it a good time to buy stocks? Some investors would say the current negativity dominating the financial media means you are better off sitting on the sidelines. Others would say it is always a good time to buy stocks, provided you can get them for good prices.
Count John Buckingham, editor of the Prudent Speculator, in the latter camp. He is a value investor with decades of experience. During an interview, he emphasized the importance of remaining disciplined through all market conditions. While he favors the value style, he believes that if you avoid “letting emotions cloud your judgment,” you can be successful with any reasonable long-term strategy.
He also named eight value stocks that appear to be bargain-priced right now. They are listed below.
The Prudent Speculator (TPS) is published by Kovitz Investment Group of Chicago. It has the top performance ranking among newsletters for 30 years through March 31 at the Hulbert Financial Digest. For that period, TPS portfolio’s average annual return has been 13.76%, according to Mark Hulbert. In comparison, the average annual return for the S&P 500
was 9.75%, according to FactSet. Even that is a good number, emphasizing how effective it can be to stay the course with a broad and long-term approach to stock investing.
Value stocks are generally those of mature companies with relatively stable businesses that trade at lower valuations to earnings or book value than growth stocks do. They also tend to pay dividends. In general, with value stocks you are paying for immediate cash flow, while with growth stocks you are paying for future cash flow.
And the growth style outperformed for years during the bull market that ended early last year, when the long period of very low interest rates was reversed. But over very long periods, the value style has outperformed, according to Buckingham, who cited data going back to 1927:
The prospect of a slowing economy, and the higher interest rates that can pay you as much as 5% for a one-year certificate of deposit at a bank, might keep the stock market subdued, with limited enthusiasm and options for people looking to avoid risk.
But the stock market’s performance is always unpredictable over the short term, and attempts at timing the market typically lead to underperformance against a broad index because the tendency is to return to the market after a rebound has started.
Long-term investors have to tolerate the peaks and valleys of the stock market. Otherwise they risk getting creamed when selling into a down market and underperforming as they return in the midst of an upswing. In this chart summarizing up and down swings for the S&P 500, you can see that downturns happen with the same frequency as upturns, but the downturns tend to be of lower magnitude and for shorter periods:
There is one more chart that should be of interest, relating to investors’ attempts to time the market. Buckingham said “a majority of investors have a propensity to buy high and sell low,” as they react to news.
Here’s a summary of results for Dalbar’s Quantitative Analysis of Investor Behavior through 2022:
Take a look at the five-year and 10-year figures — the average investor has underperformed the S&P 500 (or funds that track the benchmark index, such as the SPDR S&P 500 ETF Trust
) by a wide margin.
TPS selection methodology and eight value-stock examples
The Prudent Speculator team begins with a group of about 2,800 liquid stocks of companies listed in the U.S. (including secondary listings by non-U.S. companies) and then scores the group “on a variety of metrics that heretofore have been good predictors of outperformance.” These include valuation relative to earnings, sales and cash flow, as well as free cash flow yields and enterprise value to operating earnings. “We use these metrics because they have tested well — intuitively they make sense,” Buckingham said.
He and his team narrow down the investible universe to 125 recommended names in the newsletter.
One reason to consider a large variety of metrics is that any one measure of valuation or performance can be distorted. Consider return on equity. A profitable company’s total equity capital might be a negative figure, as it was for Home Depot Inc.
as of Jan. 31, 2022 (the end of its fiscal 2021), to name an example.
And for a valuation measure such as price to book value, quarterly marks-to-market for securities portfolios held by banks, insurance companies and even Berkshire Hathaway Inc.
can distort the figures.
Under accounting rules, unrealized gains or losses on securities are now reflected in Berkshire’s earnings every quarter. In his most recent annual letter to shareholders, Berkshire CEO Warren Buffett wrote: “The GAAP earnings are 100% misleading when viewed quarterly or even annually. Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.”
That is only one example of how pinning reactions on individual bits of data can work against you.
Buckingham and his team not only publish TPS, they manage money for individual investors and through the Al Frank Fund
named after the original editor of the newsletter. He said that one effect of reading the newsletter is that it helps investors understand the importance of being patient through the market’s ups and downs.
Here are eight examples of stocks recommended by TPS. All have declined at least 10% this year, “while we think significant three-to-five-year appreciation potential exists,” Buckingham said :
|Company or index||Ticker||Dividend yield||Forward P/E||10-year average forward P/E|
|CVS Health Corp.||
|HF Sinclair Corp.||
|Fifth Third Bancorp||
|Greenbrier Companies Inc.||
|Sources: Kovitz for TPS stock selection, FactSet for all other data.|
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