How many twists and turns does this road have? More than you or I can count! Last week, the media screamers were telling us to jump into our bomb shelters, because both Greece and the United States were about to default. Now, instead, we’re told that Eurozone leaders and the IMF have worked out yet another bailout for Greece — and that President Obama may be close to a budget deal with the GOP.
In such a fluid situation, it’s hard to know exactly what, and whom, to believe. But those are generally the times when I’ve found it’s best just to heed “the bloodless verdict of the market.” As Jimmy Dines likes to say, “Don’t think. Look!”
In other words, don’t over-analyze. Focus on the one glaring fact staring you in the face: The major stock indexes, domestic and foreign, refuse to stay down.
After yesterday’s surge (the second biggie of the week), the S&P 500 stands less than 1.5% below its high for the year, set April 29. That can only mean there’s a huge amount of buying power rushing into stocks — billions of dollars, all saying the bears have got it wrong. Unless something very bad, and very unexpected, happens very quickly, we probably won’t see the June lows again for the rest of this market cycle.
With most mutual funds now above a safe buy limit, I recommend steering your new money primarily into individual stocks. Wednesday, Government Properties Income Trust (NYSE:GOV) floated another follow-on offering, this time for 6.5 million new shares.
Why is GOV issuing more stock? My guess is that the REIT’s acquisition pipeline is starting to fill up. In May, the trust bought a New York City office building, primarily tenanted by the United Nations, for $114 million. To keep doing deals of that size at favorable interest rates, GOV needs to raise equity from time to time. This is standard operating procedure for REITs (and master limited partnerships, too, by the way).
Buy GOV at $26 or less. Current yield: 6.6%, double what you could earn on a 10-year Treasury note.
Another technique that can give you an edge in the current market is to buy stocks that temporarily get knocked down during earnings season. These days, so many trigger-happy investors are playing the quarterly earnings game that, for a brief period, they can drive share prices far out of line with fundamental value.
We saw that happen yesterday with Pepsico (NYSE:PEP). PEP reported solid Q2 earnings, up 10% from the year-ago period. However, the beverage producer lowered its forecast for profit growth in 2011 as a whole to 5%-7% (before currency translation), from a previous estimate of 7%-8% in April.
Clearly, PEP is facing some challenges in pushing through price increases to make up for higher costs for ingredients and plastic packaging. However, this is an extremely minor, short-term issue–certainly not worth a 3% nick to the share price.
Remember, this outfit has raised its dividend 39 years in a row. You can’t compile a record like that if you don’t know how to keep your prices in line with your costs.
If you don’t already own Pepsico, Mr. Market is handing you a chance to chug down this iconic brand at a nice discount. Pay up to $70. Current yield: 3.1%. From here, I’m projecting a total return (dividends plus price gain) of at least 20% in the coming year.
