VERSACE: Picking stocks in a queasy market

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ANALYSIS/OPINION:

There is a growing sense of unease in the investment community and, in looking at the headlines over the past several weeks, it is easy to see why the queasiness is on the rise.

The most recent rash of economic readings from Europe have signaled the slowdown is spreading from Greece and Spain to Britain and Germany. With the next round of elections in Greece on June 17 and the European Central Bank (ECB) taking a standoffish approach to the mounting issues in Europe, much has yet to be sorted out.

Add to those European unknowns our own domestic ones — Obamacare, tax reform, the need to raise the debt ceiling, the presidential election and, of course, the dreaded “fiscal cliff” — and it isn’t hard to understand why investors have turned more bearish.

By bearish, I mean increasingly pessimistic on the direction of the stock market. Keep in mind that since the stock market peaked in early April, the S&P 500 has fallen nearly 7 percent over the past few weeks.

The latest reading of the American Association of Individual Investors Sentiment Index, which measures the percentage of individual investors who are bullish, bearish and neutral for the next six months, shows that as of June 6, the bulls stand at 27.5 percent, while the bears check in at 45.8 percent. To put some perspective on those figures, the long-term average percentages stand at 39 percent bullish and 30 percent bearish.

That pessimism is reflected in the amount of money coming out of the stock market. According to the Investment Company Institute, domestic stock funds saw 13 consecutive weeks of outflows as of late May. In the week ended May 23 alone, investors yanked an estimated $7.2 billion from the category — $3.8 billion more than they withdrew the prior week. Year to date, the funds have experienced more than $38 billion in outflows in 2012 following 2011’s $85 billion in U.S. stock-fund outflows.

Yet with interest rates low and likely to remain so for some time, interest-bearing accounts, be they certificates of deposit or just plain old savings accounts, are offering interest rates well below 2 percent. On an inflation-adjusted basis, that means you are more likely that not losing money. As tempting as it may be to stuff the mattress with cash, that does little to help you in the long run.

The question then becomes: Where should investors turn at a time of low returns and increasing stock market uncertainty?

One area that investors can turn to is dividend-paying stocks, particularly those that are offering dividend yields that are above the S&P 500’s 2.5 percent yield at its current price levels.

For those unfamiliar with a dividend yield, it is the annual dividend paid by a company divided by the company’s current stock price. For example, semiconductor capital equipment company Applied Materials is paying an annual dividend of 36 cents per share and its current stock price as I write this is $10.73, which means its dividend yield is 3.4%.

That is but one example, and there is no shortage of companies paying dividends. In fact, there are some stocks that are offering too-good-to-be-true dividend yields, and this likely means their business model is troubled or on the wane. A great example of that is RadioShack Corp. — the company pays an annual dividend of 48 cents per share, which equates to an 11 percent yield. The “but” here is that RadioShack’s has performed well below expectations over the last several quarters, and its stock has fallen from a high of $16.25 in the last year to the current $4.45.

As the saying goes, choose wisely and be sure the underlying company’s business is a solid one.

Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com, or follow him on Twitter @_chrisversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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