Time to Examine Investment Strategies

With the stock market having taken a wild roller-coaster ride this past week, it makes sense for investors to rethink their investment strategies.

This is not necessarily a time for change. But it is an opportunity to consider whether all the reasons that spurred you to invest in the past still hold true, or whether there are suddenly new reasons to invest that were not there before.

“I am not saying that this is the buying opportunity of a lifetime, because the market has advanced spectacularly over the past year and it is expensive on many levels,” said Robert Haber, portfolio manager of Fidelity Investments Balanced Fund. “But this is also not necessarily the time to sell.”

It is time to examine.

“If you are in the stock market, check to see that the fundamentals are still there. If you are not in, don’t jump just because the prices are a bit lower,” said James Kuttner, academic associate in advanced studies at the College for Financial Planning in Denver. “I don’t think anyone can say the market has dropped low enough to make this a no-brainer. There is still a lot of danger, but the risks are less when it’s run off some steam than when it’s hitting new highs.”

What do you look at when considering whether to buy or sell stocks? First, consider your other investment options.

Right now that’s a rather bleak picture. Treasury bills are yielding less than 5%. One-year certificates of deposit are in the 5% to 6% range. Money market accounts offer a bit less; insurance annuities promise slightly more. Even yields on mortgage-backed securities are not particularly generous.

And these returns are probably not likely to get richer soon.

The economy is weak, so banks are less likely to lend, which means they are less likely to offer generous rates for your deposits. Although experts believe that the economy is ready to turn the corner in the first quarter of 1992, they are predicting a slow recovery that will not spur hikes in inflation or interest rates.

Now a look at stocks. By historical standards, the stock market is high. On average, big company stocks are selling at prices equal to 22 times their current per-share earnings. Dividend yields, on average, are down to just about 3%--overvalued territory, said Geraldine Weiss, editor of Investment Quality Trends.

But, said Michael Metz, market strategist at Oppenheimer & Co.: “People don’t invest in averages, they invest in stocks.”

And, when you look at individual stocks, you are likely to find some real bargains, experts say.

One reason is dividends. Many companies pay stable quarterly cash dividends. And right now dividend yields can pay you more than savings deposits. If the company’s dividend is not at risk, any appreciation in its stock price is an added bonus, experts say.

“If you could buy a bunch of high-quality stocks that yield the same as money markets or Treasury bills, every indicator in the world would tell you that you’d be crazy not to buy the stock,” Haber said.

If the company does not pay dividends, however, investors must look to appreciation if they hope to take home any return at all.

Haber suggests that individuals look at industrial stocks and natural gas companies. He’s particularly high on Methode Electronics, which makes air bags for Chrysler and Ford. Air bags are hot and Methode seems to be gaining market share, he said.

He’s also enthused about a gas company called Kelly. Kelly Partners, a Houston-based natural gas company that sells on the American Stock Exchange, recently raised its dividend and the stock now yields 11.8%. Better yet, it has no debt, he said.

Haber also likes J. C. Penney, a national retail department store chain. Penney’s stock dividend pays 5.3% at today’s prices, and the company’s balance sheet is strong, he said. Penney’s has also been cutting costs, which strengthens its future prospects, he said.

Meanwhile, Weiss is a fan of Dun & Bradstreet, an information company that has increased its dividend 25 times in the past 25 years. The stock is now yielding 4.5%. But Weiss wouldn’t buy until the stock price drops to $43, which would boost the dividend yield to 5%, she said.

Additionally, she believes that utility companies are still worth a look. Many utility companies pay dividends that yield between 6% and 8%. That’s clearly better than a certificate of deposit, she said. And those high dividend payments tend to support utility stock prices too, she noted.

Metz, on the other hand, likes the look of industries in crisis. Selected insurance companies, regional banks and drug companies are all attractive on a “short- to medium-term basis,” he said.