If you’re a bargain-shopping investor, there’s certainly no shortage of discounts to consider right now. Even a handful of high-quality blue chips are on sale. Namely, Dow Jones Industrial Average (DJINDICES: ^DJI) components Verizon Communications (NYSE: VZ), The Travelers Companies (NYSE: TRV), and IBM (NYSE: IBM) lost ground in July despite the Dow’s 7% gain during the month.
Before plowing into the Dow’s biggest losers in July just because they’re on sale, however, take a step back and reconsider. One bad calendar month doesn’t inherently make these stocks any more investment-worthy than they were as of the end of June.
What went wrong
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The sell-offs make enough sense in and of themselves. Verizon lost 215,000 (net) postpaid consumer wireless accounts, up-ending the stock. IBM scaled back its cash flow outlook for the full year. Insurance company Travelers managed to top its second-quarter earnings estimates, but still reported a drastic tumble in its profits due to soaring catastrophic claims linked to the COVID-19 pandemic. Those reports took anywhere between 6% and 9% off these stocks’ values during July, and understandably so.
Still, all three of these companies are pedigreed names that will clearly be around for years. Might these sell-offs be a chance to scoop up some bargains?
Maybe. The premise of the question itself, however, is a bit misleading.
Don’t misunderstand — a good stock worth owning is an even better investment if you can step into it at a lower price. A lower price, though, doesn’t necessarily make a stock worth owning.
In simpler terms, if you weren’t a fan of IBM, Travelers, or Verizon a month earlier, June’s setbacks don’t make them better companies. They just make them cheaper stocks.
The explanation sounds silly at first, seemingly complicating a simple issue. The fact of the matter is, however, the explanation cuts right to the heart of most investors’ philosophies: Are you price-focused, or are you quality focused? Certainly, you can seek out quality picks while also being cost-conscious. If you only began considering a stake in the three aforementioned Dow stocks because they tanked in July though, you’re likely price-focused — which can be a mistake.
Ever heard of William O’Neil? You may be more familiar with him than you realize. He’s the founder of the Investor’s Business Daily newspaper (and now website). He’s also the author of the best-selling book How to Make Money in Stocks.
Just as the title suggests, based on years’ worth of historical data available at the time, O’Neil’s book explains what investors should look for in stocks that log market-beating performances. He specifically cites seven criteria, like sector-leadership, institutional interest, and earnings growth. Curiously, of the seven most important traits O’Neil’s research indicates investors should worry about, not one of them is valuation-based, or price-based; successful users of the approach will even concede they’ve paid seemingly steep prices for some of their picks, only to see those outrageous valuations become even more outrageous as those tickers continued to inch their way higher.
In this vein, Boeing was one of the Dow’s biggest winners in July, and the currently unprofitable company is trading at nearly 40 times next year’s expected earnings. Go figure.
You really are buying into companies
The point is, it’s easy (often too easy) to become so distracted by things like sell-off-driven discounts and subsequently cheap valuations that we lose sight of the things that really matter in the long run, like whether or not a particular company has a bright future.
That doesn’t make buying such stocks while they’re on sale the wrong move. Indeed, you should make a point of buying quality stocks at a discount when you can. To do this effectively, however, you’ll typically want to manage a watchlist of good companies you’d like to own and jump in after sizable pullbacks. Just don’t fall into the trap of being penny-wise and pound-foolish; you should always expect to “pay up” for quality.
Bottom line? If you happened to be eyeing Verizon, The Travelers Companies, or IBM as a long-term investment a month ago, have at it — they’re still on sale. If you began last month with little interest in any of these three now-sold-off Dow names, though, none of them become more compelling companies in the meantime just because their stocks slipped. You may find better bets that are still out there.
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