Confessions of a Money Manager: Stock market's Thanksgiving turkeys could turn out OK

Ray Unger  —  11/28/2008 2:22 pm

Some startling news has come to light. Did you know that as of now, fully one-third of the S&P 500 companies would not meet the requirements to be on the S&P 500 index? And that if four companies that are part of the Dow Jones Industrial Average -- General Motors (GM $3.56), Bank of America (BAC $14.80), Citigroup (C $6.08), and JP Morgan Chase (JPM $29.77) -- were to fail completely (fall to zero) the Dow Jones would lose only 442 points?

Now it's doubtful that the shares of Bank of America or JP Morgan will fall to zero, but GM and Citigroup? Very possible. So those pundits who claim we have a lot more pain to absorb must think the other 26 companies that make up the Dow Jones are ripe for terrible times ahead. While that may be debatable, let's at least look at their dividends as well as current and projected earnings. You might be surprised by what the stock market has left us after Thanksgiving Day.

Here is a rather cumbersome table, but I included it to show those who like data how I arrived at the averages listed at the bottom. First, let's define the headings. The first three columns simply list the symbol, company name, and stock price as of Tuesday. The next two columns list the amount the company pays in cash dividends per share and the yield it pays as a percentage of the stock price.

The next two columns list the actual trailing 12 months earnings, and the price-to-earnings ratio based on those earnings. The last two columns list the projected earnings for the forward 12 months (derived from the consensus of projections provided through Yahoo.com's financial pages) and similar price-to-earnings ratios based on these projections. While all such projections are really just intelligent guesses, the analysts who made such guesses have certainly accounted for the economy's future weakness into those guesses.

After all is said and done, our 26 Dow Jones Industrial Average stocks yield an average of 4.1 percent. Not bad considering that 30-year U.S. Treasury bonds yield 3.7 percent. Those interested in shorter-term U.S. Treasuries obligations have to accept less: 10-year notes yield 3.2 percent; 5-year notes yield 2.1 percent, and 6-month bills yield a meager 0.54 percent.

U.S. Treasury obligations, however, are secure and they're not as volatile as stocks. But today, investors are getting paid more to own the Dow 26.

Bases on trailing and projected earnings, these same stocks are now selling at or near historic lows of 10 times earnings. During the 1973-74 bear market I recall that price-to-earnings ratios were in the high single digit area -- from 7 to 10 times earnings. During those years, however, inflation was in double digits after the oil embargo led to a three-fold spike in oil prices, dragging up other prices with it.

Today, instead of combating inflation, we're more concerned with deflation. Oil, natural gas, and a host of other important commodities have fallen in price, and while such price declines have helped consumers, it's created problems for our gross domestic product.

Notwithstanding the negative financial meltdown, the Dow Jones 26 seem reasonably priced. What does this mean relative to the Dow Jones 30? Well, if we factor in the stock prices of General Motors, Bank of America, Citigroup, and JP Morgan and divide that total by the Dow Jones 30 Industrial Average divisor of .125552709, you can see that if these four companies fell to zero, the Dow Jones would fall 442 points. Based on Tuesday's closing quote on the Dow Jones Industrial Average of 8,479.47, that would put the Dow Jones 26 at 8,037.47.

Do we have something to be thankful for on Thanksgiving? If you've lost market value in your brokerage account or 401(k), you're not a happy camper. But going forward, if you keep the faith and invest in the Dow Jones 26, you may find that today's Thanksgiving Day turkeys may actually prove profitable in 2009.

Ray Unger  —  11/28/2008 2:22 pm