"Caterpillar doesn’t seem that cheap if you only look at the price-to-earnings ratio. It’s forward P/E is 16.7 which is above the average of the S&P 500. BUT- it has plenty of other value fundamentals including a price-to-book ratio and price-to-sales ratio that are both flashing value. Caterpillar’s shares have been crushed in the last year. These are dark times for the company. But earnings estimates look like they may have bottomed. The shares, too, are up off the lows.
Zach's recommendation recalled my recent decision to buy gold mining shares (Goldcorp and Barrick Gold) a sector have also been out of favor.
On a recent trip to Spain, my savvy brother (who has the "greenest" thumb I know) said the spot price of gold will double in a few years and -- the precious metals market being what it is -- gold mining equities will benefit disproportionately from this run-up. (At the end of this post, I will copy the "gold purchase recommendation" I made to family and friends.)
My purpose in writing today is to satisfy a longstanding urge to document durable investment counsel for my children so they can dependably make money in the stock market with very little downside risk and considerable upside potential.
It is often said that "if something sounds too good to be true" it probably isn't.
You judge.
After studying the market for nearly half a century, Zack's Caterpillar recommendation recapitulates my own "value findings."
Buy battered shares of high-quality companies when share price has been lingering in cyclical troughs.
The chances of "high-quality" Caterpillar "going out of business" are vanishingly remote, the likelihood of booming sales in the next economic expansion is a fait accompli, and the stock now sells for "half" its 52 week high.
(I should make parenthetical mention that it is always possible to suffer another decades-long "Great Depression." However, if another Great Depression were to occur, national and global markets would be so topsy turvy that there might be no safe investment haven except precious metals so that holding at least 10% of one's liquid assets in "the shiny stuff" -- assuming you "get in low" -- is probably advisable. As an aside, it also bears mention that individuals should invest no more than 50% of their savings - and perhaps no more than 25% - in stocks. The recommended percentage declines with age.)
It is difficult to say when Caterpillar's cyclical tide will turn.
But when it does, "CAT" will (almost certainly) come roaring back, with every likelihood of doubling its share price in a year or two.
Caterpillar's stock history over the last 20 years reveals four troughs when Caterpillar shares fell by nearly half (with subsequent surges) indicating that cyclical recovery is "never" more than 5 years out.
Add to this scenario the fact that buying Caterpillar now "locks in" a dividend of 3.08% and one can reasonably predict that no later than 2021, the annual return for investors who buy shares now will be somewhere between 20 and 25%.
You can (almost) bank on it.
If one has an IRA, what better place to "park" one's "static" money than in financially-secure cyclical stocks that are currently out of favor. (It is simple to determine which cyclicals are currently "on the outs." The Motley Fool's "Investing In Cyclicals" provides useful insight: http://www.fool.com/investing/value/2007/01/24/investing-in-cyclicals.aspx)
Although everyone knows the wisdom of "buying low and selling high," relatively few people do so because most "active investors" are young, testosterone-driven males looking to make "a quick killing" by "catching the wave" of "the next big thing."
The trouble with "the next big thing" is that "changing fashion" and the constant "apparition" of newly-created "black boxes" often reduce "the next big thing" to an "anachronistic dud."
Something to keep in mind...
No one can dependably determine when a stock will "bottom."
This means that the decision to buy cyclical stocks "somewhere in the trough," requires enough prior research so that a minimum 20% annual return over the next five years looks overwhelmingly likely from that price point where one enters the market.
Keep in mind that it is highly likely -- almost inevitable -- that the price of your "cyclically low-priced stock" will go even lower that your purchase price.
Here is a simple but difficult pill to swallow: "To win at this game, you've got to be in the game."
If you are determined to buy at THE BOTTOM -- and can neither find it nor bring yourself to purchase once a stock starts to rise -- the chances are you will never buy.
So buy those high-quality cyclical stocks (that you've judiciously chosen) when they're deep in a trough and when the purchase price history of your chosen stock indicates the price will double when the cyclical "downside" is replaced by the cyclical "upside."
It is also useful to know that troughs tend to be brief -- and "climbing out of them" relatively long and sustained -- which means it is a useful guide to buy when the share price of a high-quality cyclical stock dips by half (or more)
A final note...
In addition to "cyclical stock" haveing a survivable balance sheet over the long haul, it is strongly recommended that post-recovery price-earnings ratios be no higher than the overall market and and revenue trajectories bode well. You don't want to invest in certain cyclical stocks whose product is no longer desirable; e.g., telephone companies that are primarily land-line carriers.
Gold Purchase Recommendation
Dear D,
"On paper" I have made between $3000.00 and $4000.00 this week with gold stocks recently purchased through my IRA.
Shortly before I left for Nicaragua in 1988, I drew G's attention to gold as an investment and he has kept an eye on gold ever since.
While in Spain, G repeated his prediction that the U.S. and World economies will soon be seriously shaken, perhaps within the next few years.
G went on to say that he thinks the spot price of gold will double as a result of this shock - gold always being seen as a "safe haven."
The only investment G currently recommends is gold - an investment he himself has made.
Two things must be made clear:
1.) The stock market is unpredictable and NO ONE KNOWS what''s going to happen. Everything can go up in smoke - even real estate which was long considered "fireproof."
2.) Of all the people I know, G has the "greenest thumb" when it comes to making money.
About a month ago I asked G if this was a good time to "get into the gold market" and he said "Yes."
So I did... and I've been "in the black" ever since.
Please keep in mind that markets fluctuate and -- while waiting for the definitive, bullish move in gold (which may have started with the recent 10 surge in the price of gold) -- I will not be shocked to see my "paper gains" eliminated.
However, even though the major gold mining companies -- Barrick Gold, Newmont Mining and Goldcorp -- are nearly 100% higher than their recent lows, they are still trading at one quarter to one third their 2011 "highs."
These equities are also trading at prices that have "manifest" every year going back to the early-to-mid 1990s which means (as I see it) that there is currently very little downside risk and lots of upside potential.
I have been talking with D about cashing in his "hi tech" mutual fund and reinvesting that money in a company like Barrick - or a gold-mining mutual fund (also called "gold ETFs").
I think M should do likewise.
Right now seems an extraordinary opportunity to purchase high-quality gold stocks i.e those with a long successful track record and lots of geologically proven "reserves."
With a few years' patience, I expect to see the upward movement of these stocks "at least" double -- if not triple or quadruple -- one's investment.
Again...
NOTHING IS CERTAIN.
However, the risk-reward ratio currently appears unusually favorable for investment in gold mining equities whose appreciation is much more highly-leveraged than the appreciation of the metal itself.
If you want to invest some of your IRA, G says that 10% of one's liquid assets is a good amount for starters.
If I recall correctly, G also entertained investing twice that amount.
EM -- who has been a life-long investor... and a fellow who pays LOTS of attention to national and global markets -- has also taken G's advice. (I believe he bought shares of Newmont Mining.)
If you would like help transferring some of your IRA to a top-notch broker, I will assist you in opening an account with Charles Schwab who has a Chapel Hill office staffed by good, helpful people. (This office is on Route 54 just west of Meadowmont.
A final note...
There is NO ASSURANCE WHATSOEVER that any investment scheme will work out as planned.
That said, if the "spot price" (i.e., the per ounce price) of gold "retreats" 7%-10% I will buy more stock.
Paz contigo
Alan
A Good Way For Young Heirs To Invest Their Money
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