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Wed. May. 27, 2009

Is Now The Right Time To Start Investing? *

Over the last six to eight months, there have been several prognosticators saying the market has finally hit bottom. In most cases they were quickly proven wrong as stocks continued to decline. What’s an investor to do? When is the right time to start investing?

If you are a trader, peaks and bottoms are very important. You want to sell at the peak and buy back into the market at the bottom and wait for the next peak.  The problem is peaks and bottoms are much easier to identify once some time has passed.  An alternative to this market timing approach is a long-term buy-and-hold strategy that focus on dividend stocks selected using a value oriented approach.

Not only are many dividend stocks are selling at a discount to their five-year highs, but many are selling at a discount based on their current fair value calculations.  Consider these five stocks:

1. United Technologies Corp. (UTX) – Analysis
Five-year High: $107.88
Five-year Low: $37.56
Calculated Fair Value: $56.27
Recent price: $50

2. PepsiCo, Inc. (PEP) – Analysis
Five-year High: $79.57
Five-year Low: $45.81
Calculated Fair Value: $55.10
Recent price: $50

3. Chevron Corp. (CVX) – Analysis
Five-year High: $103.09
Five-year Low: $50.51
Calculated Fair Value: $72.91
Recent price: $65

4. Procter & Gamble Co. (PG) – Analysis
Five-year High: $111.18
Five-year Low: $44.18
Calculated Fair Value: $64.36
Recent price: $50

5. Johnson & Johnson (JNJ) – Analysis
Five-year High: $72.22
Five-year Low: $46.60
Calculated Fair Value: $62.25
Recent price: $55

The five-year high and low numbers were based on the data from April 30, 2004 to April 30, 2009. The calculated fair value is the lower of the Mid-2 valuation or the NPV MMA Diff. needed to achieve a predefined target.

The beauty of an income focused long-term, buy-and-hold strategy is the future declines are not necessarily a bad thing. This allows you to buy more shares at a lower price which in turn will provide you with a higher yield. There isn’t going to be a giant neon sign in the sky that tells you, “The market has now reached its bottom, it is now safe to start investing again.”

For those still looking for the bottom, let me leave you with this week’s call from an acclaimed economist. Robert J. Gordon, a macroeconomist and professor at Northwestern University thinks the recession is over. He is one of seven members of the elite Business Cycle Dating Committee of the National Bureau of Economic Analysis (the people who decide officially, for the record books, when recessions begin and end). Gordon bases his call on an indicator that he says the Committee never even looks at: the so-called “jobless claims” number that is released every Thursday morning. According to Gordon’s research, in every recession since 1974, the peak in jobless claims came within weeks of the bottom of the recession. It appears this number might have peaked in early April.

Just as a stopped clock has the correct time two times a day, eventually one of these guys will get it right. Filter out the noise, have an investing plan and stick with it.

Full Disclosure: Long in all the aforementioned companies. See a list of all my income holdings here.

(Photo: Gerard79)

6 Responses to “Is Now The Right Time To Start Investing? *”

  1. I just added to my PEP position yesterday. It seems like a bargain, especially since it trades so much off its highs and barely above its lows.

    I also track PEP’s price differential with KO, and it is only trading at about 4 points higher, whereas 10-15 has been a more common price differential in recent years.

    Something just doesn’t seem right with PEP. Any ideas? My thinking is that PEP’s recent bid to buy out two of its bottlers, was more out of panic than opportunity, because bottlers maybe are carrying more non-PEP products than PEP wants. So, perhaps PEP is worried about future growth.

  2. Joseph: I have seen some criticism of PEP’s diversification, but I am not sure I am buying into it. I will likely add to my position next month. KO based on my model is trading at a premium, while PEP is trading at a discount. I would much rather buy them when they are cheap.

    Best Wishes,
    D4L

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