Stock Valuations
Feb 4, 2009
Posted by Jody Eisenman | Filed under Uncategorized
Many people have asked me over the last several months if the market is oversold. They point out companies like Dow Chemical selling at around 4 times earnings with a 14.5% dividend, and General Electric selling at 6 times earnings with a 10% dividend. They even point out that one could buy closed end municipal bond funds with 6-7% tax free dividends that are trading at 15-20% discounts to net asset values. Are these stocks really that cheap?
I don’t think so. In the cases of Dow and GE, you are talking about companies that have declining sales and earnings. Their dividends are certainly at risk. In Dow’s case, recent quarterly losses due to the economy are causing institutions to dump the stock out of their portfolios. GE might be in even worse shape. GE is now primarily a financial services company that has a leveraged balance sheet. As the recession deepens, the defaults on their loan portfolio is growing. There is really no telling where this could end, but it would not be a shock to me if the stock traded into the single digits. Already, the stock has lost about a third of its’ value in 2009 alone. Of course, if one thinks that we are nearing the end of the recession, these stocks are probably screaming buys. I still think the economy is going to get worse before it gets better.
In terms of the closed end funds, many have used leverage via auction rate preferred securities. This fact alone puts these funds in a high risk category. Some of these funds have shown huge losses due to the leverage employed and the decline in bond prices. Again, I think purchasing these funds only make sense to an investor with a high risk tolerance.
The stock market had a pretty good day, with the DJIA rising 141 points. After the close, Disney reported disappointing earnings, showing once again that the economy is taking its’ toll on almost every sector. The only trading that makes sense to me is that of the short term variety if you have that risk tolerance. If you want safety, stock to treasuries and insured CDS. You won’t make much of a return, but you won’t lose either.
