March 14, 2015

The markets continue to be tumultuous and we’re seeing the markets re-test the lows that were reached in August. Since October 29th, the S&P 500 is down 8.5%, the Russell 2000 is down 10.7% and the emerging markets are down over 15%. Even energy stocks are getting hit hard. Should you be selling stocks, gritting your teeth and hanging on or be stepping up to the plate and buying?

To answer that question, you can’t just look at the headlines or your account value and decide whether or not action should be taken. The market headlines are based on averages. Movements of the bigger companies in the averages can easily skew the performance. The financials have been getting hammered lately and financials make up a large part of the S&P 500.

Of course, that doesn’t mean that other stocks are immune. Investors (and traders) can panic when they see the decline of the averages and they sell everything. And sell they have.

The decision to buy, sell or hold shouldn’t be based on the overall market. It shouldn’t be based on fear or greed. I believe we need to look at individual holdings to determine which action we should take.

I don’t know of anyone who has stopped using their telephone or internet based on the recent decline in the market. You’ll continue to use it and you’ll continue to pay your phone bill month after month. That’s money the telephone companies can use to grow their businesses and to pay dividends. Rural telephone companies also receive subsidies from the U.S. Government. This represents a very stable cash flow.

To say that differently, a rural telephone company’s ability to pay their dividend usually isn’t affected by the economic cycle. That’s one reason I regularly use them in my clients’ portfolios.

That hasn’t prevented a sell-off of these rural telephone carriers of late. Those buying these stable companies now are handsomely rewarded by higher dividend yield (many now in the 6-10% range).

The underlying businesses of these companies haven’t changed. Their ability to pay and increase their dividends hasn’t changed. So it’s hard to justify selling them now. It’s quite easy to build the case for buying them.

Another group of securities that haven’t been fairing well lately is the closed-end bond funds. Typically, bond funds do well when the stock market is falling and interest rates are going down. Credit-related panic selling, though, has driven the price some quality shares down 8-10%. Will the credit crunch adversely affect these holdings?

I don’t think it will. There are closed-end funds with attractive portfolios of bonds that can be purchased for less than the underlying costs of the bonds themselves. For instance, a sovereign government fund isn’t going to be adversely affected by the sub-prime mortgage situation, yet these shares have been sold-off just like everything else. But they continue to pay their dividends and have yields over 6%.

With the 10-year U.S. Treasury now yielding less than 4%, these are very attractive yields. As market fears subside, investors looking for a higher level of income will once again recognize these securities and move money back into them. That should bring a recovery in their share prices. In the meantime, we continue to earn over double the 10-year Treasury note.

In short, if we just look at the headline numbers of the major stock market averages, it’s easy to come to the conclusion that we should get fearful, sell off stocks and move a large part of the portfolio to cash. When you dig below the headlines and do some research you see that there are high-quality, defensive companies that make sense to continue to hold and to buy more.

I’ve just highlighted a few examples. The market downturn, in my opinion, has also created some attractive opportunities in growth-oriented companies. In particular, I like companies that are part of longer-term global trends. For instance, global growth and the need for alternative energy have spurred tremendous demand in several industries. Those stocks are now very attractive.

The key is to not run with the herd. When everyone is rushing for the exits, those brave enough to stay behind can pick up some real bargains. I believe that now is one of those times.

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