Stocks put on a handsome rally Monday, but the advance fizzled today as a backlog of fears about Europe, combined with a torrent of selling in Facebook (NASDAQ:FB), sapped investor confidence. If the biggest and most eagerly awaited IPO in history is going to hand you an 18% loss after just three days of trading, who but a chump would want to own stocks?
You and I know, of course, there are plenty of ways to make money in the stock market without chasing “hot” IPOs. Indeed, the Facebook deal was priced to fail at a stratospheric 28 times the company’s sales for the most recent 12 months. (I’m not interested in any stock with that price tag.)
However, the Facebook disappointment does, indirectly, affect the rest of us, too. It heightens the climate of fear and mistrust that has hovered over the stock market ever since Lehman Brothers collapsed in September 2008.
Whenever a piece of adverse news hits a company or an industry, investors “shoot first and ask questions later.” Selling begets selling, and share prices often drop far below what any reasonable estimate of corporate earnings power would justify.
I dislike this extreme volatility as much as you do, but I think we’ll be living with it for some time to come. To soothe your nerves along the way, it’s essential to hold an ample supply of bonds.
Let’s take a closer look:
DoubleLine Total Return Bond Fund (MUTF:DLTNX) remains my top pick in the fixed-income area. Current yield, based on the past three months’ cash distributions: 6.1%.
Once you’ve built up your bond stake, you can venture into our recommended stocks for higher returns. Bear in mind, though, that it often takes a while for stocks to realize their full potential. Especially in commodity-based industries like oil-and-gas production (or gold mining), you should plan to hang on to your investments at least a year or two in order to capture a meaningful upswing in the company’s business fortunes.
Some readers have asked lately about Enerplus Resources (NYSE:ERF), a Canadian oil-and-gas producer I’ve recommended for income. I’m impressed with the strenuous efforts ERF is making to shift as much of the company’s production as possible to higher-priced oil and natural-gas liquids. Liquids output grew 9% in the March quarter (from December), a big move in such a short time.
However, I also recognize that, if natural gas prices stay depressed through the end of 2012, ERF may well have to trim its monthly dividend. In my view, the current deeply depressed share price already reflects the likelihood of a substantial dividend cut. Thus, there would be little or no advantage to selling the stock at these levels — and I’m not selling any of my shares, which I’ve owned for more than two years.
On the other hand, I’m not adding to my position, either — because I’m finding plenty of other energy stocks with generous upside potential and less risk of near-term price erosion. Hold ERF if you own it, but channel your fresh cash into names like Royal Dutch Shell (NYSE:RDS.B), or Chevron (NYSE:CVX).
RDS, a member of our main model portfolio, yields 5.2%. CVX, from our Incredible Dividend Machine, pays 3.6%. From here, I’m projecting a 20% or greater return in the coming year for both stocks.
As far as the broader market goes, it looks as if the S&P 500 index has formed, or will soon form, a temporary bottom in the 1280-1300 zone. If you were thinking of doing any selling to adjust your overall equity exposure, you should get a better chance (at higher levels) in another seven to 10 trading days. Not now!
