Smart Investing


April 6, 2012


Second quarter brings good stock investment opportunities

We're now in the second quarter of 2012, and I hope your portfolio is doing well. If you’re not invested and sitting on cash, you missed a big run-up in the first quarter.

The return on the S&P 500 was 12.6 percent, with the index rising to 1,408. You may be waiting for a big correction like last year, and while neither I nor anyone else knows for sure what will happen in the short term, I presume you will be waiting and waiting, and by year-end, you will realize you missed a return of 20 percent or so. You may be thinking, "If I buy now I may only get a 7.4 percent return by Dec. 31." While this is true, you should ask yourself if that return is better than what you're receiving now.

Also, keep in mind that 7.4 percent return is not for the full year. Annualized, the 7.4 percent return would equal a yearly return of 9.9 percent. Would that make you happy?

Maybe you’re thinking the market is just too expensive now that the S&P 500 is over 1,400. I would argue that point by saying the S&P 500 trades at 13 times earnings, which is a very reasonable multiple. The S&P 500 high reached back on Oct. 9, 2007, was 1,565, and the PE was 15.2. Putting the same multiple of 15.2 on the current earnings of $108.31 would put the S&P 500 at 1,646, a 16.9 percent gain from the current level of 1,408.

If you want to see an expensive stock market, go back to March 24, 2000, when the PE was 25.6, earnings per share were only $59.64, and the S&P 500 index was 1,527. That was more expensive, and I bet many of you were invested.

My magic number I use to come up with a target price on a company is a PE of 20, when I think things are too expensive. That would put the S&P 500 at 2,166, a 53.8 percent gain from here. The PE average over the last 15 years is 16.9, and that is the average, not the high. I know that the PE at some point will be lower than that (a good time to buy) and higher than that (a good time to sell).

Today’s public companies are returning cash to shareholders at the second highest rate since 2000 through dividends and share buybacks. And what are many investors doing? Sitting on their hands, waiting for the big decline before they jump in.

For the first quarter in 2012, mutual fund investors actually withdrew $5 billion from domestic equity funds. Where did it go? In the first quarter of 2012, taxable bond funds saw $49 billion go into their funds. This was happening as interest rates were rising.

When interest rates increase, bond values go down and investors lose money. Investors appear to be getting tired of earning 0.01 or 0.02 percent on their money in liquid accounts, but instead of buying stocks low, $39 billion went into some type of bond fund. I wonder if they think that interest rates are going to go down over the next 12-24 months as the economy grows at a 2-3 percent rate.

These bond buyers must not be looking at what is going on in the economy. Since 1992, average light vehicle sales have averaged 15.1 million per year. In 2009 and 2010, with the exception of a quick spike in the chart thanks to the Cash for Clunkers program, annual light vehicle sales dipped to 8 million a year. Since then, through February 2012, light vehicle sales have climbed back up to 15 million per year.

Inventories are hovering at record lows based on days of sales. Back in 1992, the average days of sales for inventories was nearly 47. Compare that to January 2012 at 38.6, and you will realize manufacturers must keep producing just to keep products on the shelves. There is not much of a buildup, so factories must keep producing to meet current demand. This is also good news for our transportation industry, which must continue to get products to the market on a timely basis because there is not much inventory to be counted on.

Maybe you're worried about gas going to $5 per gallon — as I’ve said before, that is unlikely. I wrote about this a few weeks ago, and I suggest you go back in the archives and read that column if you missed it. As of February 2012, the U.S. commercial and strategic oil stocks are at 224 days, the highest they have been in nearly 20 years, and well above the level of 129 days back in October 2005. The OPEC surplus production capacity is at levels not seen since 2002 and are forecast until 2013 to remain above the average of 2.7 million barrels per day.

I know the market does not move straight up, and at any day we could have a down market for a while — that’s the reality of investing. But if you’re on the sidelines or in bonds trying to protect your capital, you’re missing some great opportunities on some great companies. I’m confident enough to say that over the next two to three years, investing in the right companies will outperform bonds, real estate or any other type of reasonable investment you may be considering.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


April 6, 2012