May 1, 2003
Down, But Not Out
Value investor Randall R. Eley says the current market conditions require investors to seek out companies that are trading at a discount to avoid major losses as the economy struggles to find its footing. Last year, the portfolio manager and president of The Edgar Lomax Co. in Springfield, Virginia, used stocks with a price-to-earnings ratio of no more than 17 and dividends with an average rate of 2.8% to craft a defensive portfolio with potential upside for our Private Screening column.
Unfortunately, the market’s most recent tailspin, which started in February, hurt his stock selections considerably, producing a 29.12% loss for his five stock picks during the 52-week period from March 8, 2002, to March 7, 2003. By contrast, the Dow Jones industrial average fell by 26.79%, and the Standard & Poor’s 500 index dropped 28.81% over the same time period. But he remains confident that his picks, which he still holds, will make it through these turbulent times.
Eley expected surging oil prices to raise the fortunes of the two oil companies he selected. Yet, they both lost ground over the last year. ChevronTexaco (NYSE: CVX) was down 25.54% and ExxonMobil (NYSE: XOM) lost 18.92%. Still, the upside potential is: “Both are paying solid dividend yields—Chevron, 4.4% and Exxon, 2.7%,” he says.
Eley predicted that Dow Chemical (NYSE: DOW), which has an average dividend yield of close to 5.3%, would perform exceedingly well because of its 2001 merger with Union Carbide. But the stock is still depressed, stumbling to a 19.67% loss. “This is clearly a cyclical business,” Eley says. “Dow has a relatively strong balance sheet and there is no issue about its survival.” For example, Dow could cut its dividend to 3% and still beat the S&P 500 average yield of 1.8%.
Can a company be too big to fall? Yes, says Eley, pointing out that General Motors (NYSE: GM), which suffered against the slowdown in the auto industry, “still gets a certain benefit of the doubt from the government and the business community.” GM’s stock was hammered, posting a 48.76% loss. But “GM has reported profitable earnings, currently selling at a P/E of 9 with a dividend yield of 6.7%.”
And finally, the Philip Morris Cos. stock slid. Even its January name change to Altria Group Inc. (NYSE: MO) couldn’t prevent the negative effects of tobacco litigation and weakening consumer spending from slashing the company’s share price 32.73%. Since the company is expanding into food production and distribution, Eley remains positive. “We’ve held this company for the last seven or eight years, and it has continued earning money and maintaining a high dividend.”