Invest in patience and it will pay off

January 14th, 2014

We’re almost halfway through January and I’m now hearing about the January effect – an anomaly in which stocks tend to rise the first month of the year -- and how that will drive the market going forward. I would suggest that one not get too tied up in the January effect or who wins the Super Bowl; these really have no meaning on the fundamentals of investing but sure do make good talking time for the media.

One thing I am seeing is what I’m going to call a stealth correction. Why I call it a stealth correction is because everyone is waiting for a correction, but what I’m seeing are corrections made company by company.

The reason I say that is because we have good economic information; last week we saw the trade deficit drop from $39 billion the previous month to $34 billion last month. Also, same-store sales were up 4.1 percent year over year. And let me not forget about how factory orders had declined 0.5 percent in November yet rose 1.8 percent in December.

Yet company by company something bad comes out, such as a reduction in forward guidance or a 2 cent miss on the earnings per share, and the stock falls 10 to 15 percent. In the meantime, some of the high fliers remain high, keeping the market afloat. Going forward, the high fliers could take a dip (and probably won’t come back to their ridiculous highs) when the more stable companies begin their comeback.

Let me give you a good example of a company in our portfolio to which this has happened. Select Comfort recently fell roughly 15 to 18 percent as it reduced its guidance for the next quarter. First, let me point out that it was only for one quarter; when I invest in a company, it is not for one quarter but 18 to 24 months, or eight quarters.

The other thing investors need to be aware of with companies this has happened to is whether the drop is justified. In this case, I say “no” and here’s why. Year over year the company has seen revenue climb 5 percent from the same time last year. However, last year the stock traded at about $27 per share versus about $18 per share today.

What also is important to note is that Select Comfort has increased its marketing expense by a substantial amount. While this type of expense is costly in the short term on earnings, it usually pays benefits down the road.

One big mistake investors tend to make when they say they are watching their stocks: All they are really doing is watching the stock price and the headline news. An investor needs to take the time and look at the business, as I did with Select Comfort, and really understand the details of what is going on with that business over the next 12 to 18 months.

I have to bring up something else to help you with your investing in 2014. As many of you know, I have become a little cautious in what I’m buying for my $143 million portfolio, but that doesn’t mean you sell everything in your portfolio or stop looking for buying opportunities.

Keep in mind that U.S. companies are currently sitting on $1.8 trillion in cash.

Some of this money will be used for capital expansion, which will help the economy as new equipment is needed -- and that will create other jobs.

Some of it could be used to buy other companies, which could benefit other investors who hold the company to be acquired.

Lastly, some of it will be used for dividends and dividend increases. In addition to paying investors a higher yield, it also puts money into the economy since some of the dividend income is used by investors to live on.

What I find interesting is dividend payout ratios are at 50-year lows, currently just more than 30 percent. The average appears to be about 50 percent with highs approaching 65 percent. If you invest in, say, Cisco, which pays a 3 percent dividend and that dividend is increased by 10 percent over the next three years, your yield would have risen to 4 percent, and just two years after that you would be pushing 5 percent. This does not include any potential appreciation on the stock as the earnings rise. Wow. And people wonder why I get so excited about investing in stocks over the longer term and why I don’t panic over short-term downturns.

It’s all about investing in strong companies at a reasonably low price and being patient.

Have a question or a company you'd like me to take a look at? Email me atbrent@wilseyassetmanagement.com.

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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