Getting In At The Right Price

I was on vacation in California for the month of August and didn’t look at the stock market once. Now that I’ve caught up, I see that I didn’t miss much. There’s been a bit of a run-up, particularly in chip stocks, but the bulk of the bull market that has everybody excited happened prior to August.

That said, a key development is the strengthening economy. So far, it’s a jobless recovery, but a recovery nonetheless and for money on the sidelines that may be just the good news that’s needed to finally sound the all-clear.

Something annoying about the stock market, however, is that you can’t just analyze it on its own. You have to analyze it, understand its true current state, then try to guess how that true state will appear to other investors. It’s been described by Warren Buffett as a beauty contest in which you’re the judge, but your job is not to choose the most beautiful contestant, it’s to choose the contestant most likely to be judged most beautiful by other judges.

On that note, I think we’ll see a bit of price weakness in the next few weeks as the theme that prices have risen too far too fast gets plenty of ink. The good news about the economy is priced into the market, we’ll hear. Then, after a short retracement, we’ll be back to the races as three themes surface:

  • the economy really is improving and new jobs are soon to follow

  • winter is seasonally the best time to be in the market

  • the third year of the presidential cycle is usually positive

    So, how to prepare yourself for this short term buying opportunity followed by a rising market? As always, by choosing the stocks you want to own, then placing a limit order to buy them at a sensible price.

    I’ve followed Sun Microsystems for some time now. In my last post in July, I said that $3.50 was almost guaranteed and that I wouldn’t be shocked to buy back in at $3. Looking back, I was partially correct. We did indeed hit $3.50, but didn’t get close to $3. I doubt we will now. The bad news is out of the way with Sun. It’s still a cheap tech bellwether and I expect it will show up on radar screens as people panic to catch what’s left of the rally they’ve missed. My advice to you is to buy at prices below $4. Where exactly is up to you. Getting it at $3.50 would have been nice, but anywhere below $4 will look like pure genius in the not-too-distant future.

    Another stock that would be good to own at current prices or lower is Altria Group, formerly Philip Morris and still the largest cigarette manufacturer. Regardless of your views on the ethics of selling tobacco, it is a legal product. This is a company that has roughly the business characteristics of Procter & Gamble at half the price. The P/E is 8 and the dividend yield is 6.5%. Buying at a price below $40 would be a good move for your long-term portfolio, and probably not bad for the short term.

    Finally, you could do worse than to buy Anheuser-Busch under $50. The world’s largest brewer has been on a tear and management projects 12% growth over the next five years. The only controversy among analysts is whether it will be 12% or 11% growth, but there is no doubt that there will be healthy growth. That’s my kind of controversy.

    There you have it: a struggling internet company, a cigarette maker, and a beer brewer. You can tell I’m no saint.

    I shun short-term investing, but occasionally my long-term methods get impressive results in the short term. We may be entering such a time. My Doubling The Dow strategy has been burning up the charts this year, despite being a long-term approach that has been through a difficult time during the bear market. If you believe that we are re-entering a bull market, owning the Dow at twice its strength is smart. Doing so puts Altria, Microsoft, Intel, Coca-Cola, Wal-Mart, and all the other big names on your side. You can be sure that they will continue to thrive no matter which way the global economy goes. The best companies always come out on top and you’d be hard-pressed to find stronger companies than those on the Dow.

    For more on my Doubling The Dow brief, click here.

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