Magazine

In Praise of Boring Stocks


What's wrong with the market? Of the past 19 economic recoveries stretching back to 1912, the stock market has never been so weak, according to economist Ed Hyman at International Strategy & Investment Group. People are putting cash into their houses, buying bonds, or plowing money into mundane companies with low price-earnings ratios. Truth is, playing it safe is the right strategy for the moment for most investors. And the reason has less to do with corporate profits than with risk. When it comes to the economy, the road ahead is clear. When it comes to risk, there's no visibility.

The economic fundamentals for the U.S. are pretty healthy, despite jitters about a double-dip recession. Productivity growth is exceptionally strong. Wage gains are restrained. That translates into widening profit margins today and fatter profits as the year progresses. In past recoveries, investors began to place their bets on future profits growth early in the business cycle, sending overall stock prices higher in anticipation of better results.

Not so today. Risks are much harder to ascertain than in previous recoveries, making the valuing of stocks very difficult. Investors, for example, face the risk of getting false financial numbers from companies. With a record number of companies restating past earnings and many others putting forth idiosyncratic pro forma numbers, investors are unsure how much these companies are really worth. Fortunately, there is a strong move afoot to clarify financial statements. The post-Enron uncertainty will soon end as corporations clean house.

But the political risks weighing on investors may not. The economy was stopped cold on September 11, and another terrorist attack could do terrible harm. The stream of warnings coming out of Washington is a constant reminder to investors of global instability. So is the talk of an invasion of Iraq to oust Saddam Hussein, which could set off a new Mideast crisis and cut off the flow of oil. Until the Iraq issue is resolved and terrorism is perceived to be under control, political risk will weigh heavily on investors.

Which is why the investment mantra of the day is to put money into companies whose businesses are boringly simple to understand, with balance sheets that are clear and stock prices that are relatively cheap. Paying dividends is clearly a plus, and investing overseas is no longer a minus. Unlike the '90s, there is an unusual amount of risk in the world today of a kind that is particularly difficult to measure. Until investors get a handle on it, they are right to play it safe.


Ebola Rising
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus