I don’t believe this recent stock correction is going to lead to a dead-cat bounce. Thomas H. Kee Jr. from MarketWatch believes that we’re in some super-stage correction that may imply a crash in stock prices because of behavioral impulses. Thomas goes on to say:
My longer-term macroeconomic analysis which is called the Investment Rate, tells us that we are in the third major down period in U.S. history. The asset bubble we have all been witness to may be beginning to burst.
Markets can be more rational than you honestly think, and while the stock market breaking new all-time-highs is causing alarm bells to ring in the technical analysis camp, the fundamentals remain exceedingly strong at many of these international companies.
Why the market rally is sustainable
Some point to the slow economic growth within the United States and suggest that the broader market rally is going to be unsustainable. However, my experience has been that, after analyzing all 30 Dow Jones Industrial Average (Dow Jones Indices:.DJI) component stocks — with the exception of Pfizer Inc. (NYSE:PFE) and Chevron Corporation (NYSE:CVX) — a lot of these companies have been able to grow their net income by expanding internationally.
This means that these companies are not dependent on the macroeconomic fundamentals of the United States alone, but rather the growth of emerging economies. After all, what works within the United States also works in foreign markets, too. Because of this, companies in the Dow have been able to grow earnings at rates that are far greater than the GDP growth rate. So looking at economic indicators alone doesn’t represent the investment potential in Dow Jones Industrial Average (Dow Jones Indices:.DJI) stocks.
Technical analysts tend to ignore the growth in earnings on these income statements, and having assessed the historical and projected EPS growth across all Dow Jones Industrial Average (Dow Jones Indices:.DJI) component stocks, it seems that the short-term pullback in equities is likely to be short term. Meaning that a super-theory on economics is not going to unhinge the optimism investors have.
Stocks can also trade on earnings per share
The management teams at Fortune 500 companies, especially the ones listed on the Dow Jones industrial average, have been buying back shares for an extremely long amount of time. This helps to inflate the earnings-per-share figure on the income statement through share buybacks and the retiring of those shares.
Share buybacks do not contribute to the economy, but what they do is keep shareholders more happy by making the total number of shares floating on a stock exchange more scarce, causing a bidding frenzy. It also increases the earnings per share figure on an income statement.
Let’s look historically
So a picture is worth 10,000 words. But allow me to summarize what I am trying to illustrate. After assessing the market crash of 1987 to 1988, we can say three things about markets. They pull back, they have dips, and they rally for long periods of time. I believe that the historical pattern of minor dips with long periods of stock appreciation will hold. This means that investors should buy the dip and have a holding period that lasts longer than five years. Chances are very high that the Dow and S&P 500 will continue to rally for an extended period of time.
How to position yourself
Because I am trying to demonstrate stability across larger companies, I am going to focus on three Dow stocks that will continue to grow.
The Procter & Gamble Company (NYSE:PG) continues to roll out its line up of consumer products across the world. The company has been able to grow sales by more than 17% compounded annually since 2002 across Brazil, Russia, India, and China (BRIC) countries. This block of economic growth will continue, and this company is well-positioned to grow in these emerging economies. The company has been able to grow its sales by 2.9% on average over the past five years (mostly driven by BRIC).
The company compensates its investors with a 3.1% dividend yield, which is better than owning Treasury bonds. Analysts on a consensus basis anticipate this company to grow its earnings by 7.2% on average over the next five years. The stock offers a reasonable mix of stability, income, and growth.