Being Contrarian Is Hard
Being Contrarian Is Hard. This has been a busy weekend for me. I drove my younger daughter to her soccer game yesterday, which was two hours away. If I total up the drive time, warm up time, game time, time for lunch, time for gas, getting ready then I spent roughly 9 hours to support her soccer game. Unfortunately, her team lost to a very good team. It was their first loss in league play. She has another game today morning. Hence, I am writing this post late last night and very early today morning.
Being Contrarian is Hard But it Can Be a Time to Buy
Besides my daughter’s soccer schedule, it has been a busy week for me on the dividend growth investing front. The recent volatility in the market has provided buying opportunities for some undervalued dividend growth stocks in my opinion. Since I like being contrarian I made some buys in the defense sector, which is trading at low valuations. Personally, I like General Dynamics (GD) and Lockheed Martin (LMT) and I am long both stocks. I also added to International Business Machines (IBM), but this has more risk now since the company is spinning off about $19 billion in revenue into a new company, Lastly, I added to Mastercard (MA) and Visa (V) whose prices are down due to weakness in cross border payment volumes and low international travel. These stocks have low yield and are typically overvalued though. But realistically, they are the dominant providers of credit cards and payment transaction processing. They will grow over time as global economies recover.
Market sentiment is negative right now as you can see from discussion below on the CBOE VIX and Fear & Greed Index. Some of this is due to the uncertainty of the U.S. election and the rest is arguably due to rising new COVID-19 infections and shutdowns in Europe. Investing in an environment like this requires going against the grain or being contrarian, which can be hard to do. But despite being hard, being contrarian can be profitable even if it is not a market route and just a correction.
Being Contrarian is Hard Because Markets are Volatile
Long-term investors are more seasoned and understand that the market does not always go up and can have down days, weeks, months, and years. Corrections are when the market (or stock) declines 10%. There have been approximately 23 corrections since 1945 in the S&P 500. A bear market is when the market declines 20% or more. There have been 13 bear markets including the recent one in the same time period. Most bear markets last about 14 months and the average correction lasts five months. The shortest bear market was almost three months in 1990 and the longest bear market was 61-months.
That said, being contrarian is hard, but it can be rewarding. The saying “Buy when there is blood in the streets…” is attributed to Baron Rothschild of England, who made a fortune buying during the stock market panic surrounding the Battle of Waterloo.
In more modern times, one of the most famous contrarians was Sir John Templeton, who ran the Templeton Growth Fund from 1954 to 1992. Each $10,000 invested in the Class A shares in 1954 would have become $2 million by 1992 with dividends reinvested. This was an annualized return of ~14.5%. He would buy into countries or companies when they reached the “point of maximum pessimism.” He famously bought shares of every NYSE listed company trading for less than $1 at the start of World War II in 1939. After four years, he sold the shares with sizeable gains.
Being Contrarian Is Hard Since There is Risk Involved
Why being contrarian is hard? It is hard because there is risk involved. An individual stock can be down for a variety of reasons some which can cause long-term declines in the stock price. For instance, being contrarian with Kodak which was facing technological obsolescence from digital cameras and smartphones was probably not a good move. However, when the broader market is down there is likely good individual equities that are undervalued. Although being contrarian is hard, this is also the time to do some research and incrementally add to positions.
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Dividend Increases and Reinstatements
Gorman-Rupp Company (GRC) hiked the quarterly dividend by 6.9% to $0.155 per share from $0.145 per share. The was the 48th consecutive increase. The stock is a Dividend Champion.
Cintas Corporation (CTAS) raised the quarterly dividend by 10.2% to $2.81 per share from $2.55 per share. This was the 38th consecutive increase. The stock is a Dividend Champion and Dividend Aristocrat.
Black Hill Corp (BKH) increased the quarterly dividend 5.6% to $0.565 per share from $0.535 per share. The was the 50th straight annual increase making the stock a Dividend King.
Rollins Inc (ROL) announced a 3-for-2 stock split and special year-end dividend of $0.13 per share to be paid on the pre-split share. The regular quarterly dividend is $0.08 per share. Rollins cut the regular quarterly dividend from $0.12 per share to $0.08 per share.
West Pharmaceutical Services (WST) hiked the quarterly dividend 6.3% to $0.17 per share from $0.16 per share. This is the 28th consecutive increase. The stock is a Dividend Champion.
Exxon Mobil Corporation (XOM) announced that the regular quarterly dividend will be kept flat at $0.87 per share. The streak of annual increases is still in going. Exxon Mobil has raised the annual dividend for 37 consecutive years. The stock is a Dividend Champion and Dividend Aristocrat. You can read about my latest analysis of Exxon Mobil’s low dividend safety.
Fidelity National Financial (FNF) increased the quarterly dividend 9.1% to $0.36 per share from $0.33 per share. This is the 10th consecutive increase. The stock is a Dividend Contender.
Mueller Water Products (MWA) hiked the dividend 4.8% to $0.55 per share from $0.525 per share. This is the 6thstraight increase. The stock is a Dividend Challenger.
Coronavirus Dividend Cuts and Suspensions List
I updated my coronavirus dividend cuts and suspensions list this past Wednesday. The number of companies on the list has risen to 436. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic. The number of companies on the list continues to rise each week.
No new companies were added to the list in the past week.
I included 6 companies that I had previously missed. The 6 companies that I previously missed were Arc Resources (AETUF), Guess’ Inc (GES), MIND C.T.I. Ltd. (MNDO), Seadrill Partners LLC (SDLPF), JMP Group LLC (JMP), Spirit AeroSystems Holdings (SPR).
Dow Jones Industrial Averages (DJIA): 26,505 (-6.46%)
NASDAQ: 10,9123 (-5.51%)
S&P 500: 3,270 (-5.64%)
The S&P 500 is trading at a price-to-earnings ratio of 33.0X and the Schiller P/E Ratio is at about 29.9X. These two metrics came down quite a bit since last week due to market action. This is second down week in a row. It also made October the worst month in 2020 since March. Note that the long-term mean of these two ratios are 15.8X and 16.7X, respectively. I continue to believe that the market is overvalued at this point. I personally view anything over 30X as overvalued.
S&P 500 PE Ratio
Shiller PE Ratio
Stock Market Volatility – CBOE VIX
The CBOE VIX measuring volatility increased dramatically by over ten points to 38.02 by end of the week. This is the highest levels since early June. The VIX still remains elevated relative to the long-term average. The long-term average is approximately 19 to 20.
The CBOE VIX made a major move up in response to rising infection rates and deaths over 1,000 per day in the U.S. The U.S. election added to uncertainty in the market. In addition, lockdowns in Europe are adding to fear of a global economic slowdown. New infections in the U.S. are running at over 50,000 per day consistently. Two days the ago the number was over 100,000. Deaths are also starting to increase and are roughly 1,000 per day now. The market is seemingly inversely correlated to the number of new infections at this point. As the number of new infections rises there is downward pressure on market indices.
Fear & Greed Index – Being Contrarian is Hard
I also track the Fear & Greed Index. There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.
The Fear & Greed Index is signaling strong Fear in the market at a value of 29. This is the lowest since the market route during the depths of coronavirus pandemic.
Only Junk Bond Demand is signaling Greed and all of the other six indicators are signaling Fear or Extreme Fear. Junk Bond Demand is signaling Greed since the spread for buying low quality junk bonds is only about 2.14%, which low. Market Momentum, which is signaling Fear, took a big hit this week and the S&P 500 is trading slightly above its 125-day average. This is the lowest since May. Stock Price Strength weakened to the lower end of its range and is signaling Fear. The number of stocks at 52-week highs still exceeds those hitting lows though. Put buying volumes increased toward the higher range of the past two years signaling Fear. Stock Price Breadth is at Extreme Fear as declining issue volumes increased. Safe Haven Demand is indicating Extreme Fear as bonds are now outperforming stocks by 1.92% over the past 20 trading days. Lastly, Market Volatility is signaling Extreme Fear as the CBOE VIX spiked to about 38.
The number of weekly new unemployment claims were down with last week at 751,000. This is down 40,000 from last week’s revised numbers. We are now below 800,000. But for some perspective, one-year ago weekly unemployment claims were only about 217,000. Currently we are 3X – 4X the normal level. The seasonally adjusted insured unemployment rate was 5.3%. The weekly revised rate is now 5.8%
The ten states with the highest unemployment rates were Hawaii (12.6), California (10.5), Nevada (10.0), Georgia (8.3), District of Columbia (7.9), Louisiana (7.8), Puerto Rico (7.4), Massachusetts (7.1), New Mexico (7.1), and Illinois (6.8).
Durable goods orders for September rose $4.3 billion, or 1.9% to $237.1 billion. This is the fifth consecutive monthly increase. Manufacturing is continuing to recover. September’s increase was better than August’s 0.4%, but less than the increases of 11.7% in July and 7.7% in June.
The Commerce Department reported that an increase in exports, combined with a fall in imports resulted in a lower trade deficit of $79.4 billion in September. At $122 billion, exports increased by 2.7%, while imports of $201.4 billion decreased by 0.2%. Food exports at $12.8 billion were up 13.6%. On the import side, vehicles had the largest increase of 11.3%. In addition, imports of capital goods increased by 1.4%.
The Bureau of Economic Analysis reported the US economy grew 33.1% in the third quarter of 2020, beating forecasts of 31%. This represents the largest expansion ever, rebounding from a 31.4% drop in the second quarter. Personal spending was the main driver, led by services (increases in health care as well as food services and accommodations) and goods (led by motor vehicles and parts as well as clothing and footwear). Increases in private inventory investment, exports, nonresidential fixed investment, and residential fixed also contributed to growth. The GDP is still 3.5% below pre-pandemic levels.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.