A Pep Talk For The Market-Weary

Heaven knows we try to keep a sunny outlook on our portfolios and the market as a whole. But trying periods such as the one we have suffered through for the past week always seem to cloud our perspective. Zacks Senior Market Analyst Charles Rotblut, CFA joined us recently to give a much-needed pep talk.

What do you see as one of the biggest mistakes investors make in a market environment such as this?

During volatile market conditions, it’s not unusual for investors to abandon the very strategies that have worked for them over the long-term. Most often, this does more harm than good.

I’ve been very vocal in encouraging investors to look for fundamentally sound companies with rising earnings estimates that are trading at attractive valuations. That said, investors should stay proactive in managing their portfolios.

Specifically, investors should analyze every stock and mutual fund and ask whether they would buy it today if they did not already have money invested in it. If the answer is no, then they should consider selling those investments. It’s more prudent to take a known loss than to risk a potentially larger loss in the future.

Can you give us some perspective that we might not be seeing as we keep abreast of this bearish market?

Despite all of the headlines, the economy is in pretty good shape relative to past recessions. The unemployment rate of 6.5% is far below the typical 9% to 12% rates often seen during a recession. (During the 1930s, unemployment averaged close to 20%). Inventory levels are lean. And the Fed remains proactive.

Another positive is interest rates. European central banks issued aggressive rate cuts on Thursday, especially the Bank of England. The Federal Open Market Committee could lower its target rate for fed funds to below 1%. Combined with another potential stimulus package from the U.S., these actions should help lessen the severity of the global economic slump.

What would you say to those who are taking a more negative view of things?

Will there be more pain in the future? Yes. The unemployment rate typically rises even after the economy starts to rise. More people will lose their homes. And more businesses will fail.

However, recessions are comparatively short, and the economy will recover. The markets will recover. It’s just a matter of when, not if.

What particular companies are you bullish on currently?

Three stocks we’ve recently added to the [Zacks Focus List] portfolio are Axsys Technologies (AXYS), Bristol-Myers Squibb (BMY) and Petmed Express (PETS).

AXYS designs and manufactures camera systems, optical and motion control subsystems and related components. The products are used for both surveillance and next-generation weapons systems, areas that we think the Obama administration will continue to direct money towards. The company recently raised guidance and has a history of topping expectations.

BMY has one of the strongest growth rates among large-cap pharmaceutical companies. It also has a good mid-to-late stage pipeline. On a quantitative basis, the stock has an attractive valuation, earnings estimates are rising and the dividend yield is high.

PETS operates 1-800-PetMeds. PETS sells pharmaceutical and health products for dogs, cats and horses. The company is seeing a continued increase in reorder sales. We think it could get additional revenues as pet owners seek cheaper alternatives to their local vet. We also like the fact that operating margins have been and continue to expand.

Any final words for the market-weary?

The focus of investing ultimately is profits, and profits cannot be made by sitting out of the market. No one correctly times the market consistently. Furthermore, when big rallies occur, there is often no foreshadowing. Therefore, investors who do not need access to their investments within the next few years should consider maintaining some type of allocation to equities.

That said, there are timing risks in the current environment. A more conservative strategy is dollar-cost averaging. This strategy involves buying shares in certain stock over a period of months as opposed to a single purchase. An investor may not get the lowest price for all his transactions, but he also won’t run the risk of buying a full position (e.g. 100 shares) on the wrong day.

Keep in mind we’ve been in this situation before. During the latter half of the 19th century, a railroad bubble led to a credit crunch and economic problems. Yet the U.S. came out of it and reached an even higher level of prosperity.

Most importantly, stocks are the most effective way to build long-term wealth. Though there will be bear markets, bull market cycles tend to be more powerful and last longer.

Successful investors, such as Warren Buffet, never stop looking at stocks and neither should individual investors.

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