Fear And Uncertainty Creates Opportunity

Earnings season is upon us and in case you haven’t noticed there have been some serious pullbacks in certain dividend growth stocks. Companies have been busy publicizing their Q3 earnings and revenue numbers and it seems that the weakened economy have hurt some. It’s times like these that you have to ask yourself if you’re really in the market for the long-term or not.

For instance, McDonald’s (MCD) recently posted its worst quarterly sales growth in nine years and shares sold off by 4.46% on Friday. McDonald’s global sales at new restaurants fell below 2% for the first time in almost 10 years. So, is this the time to sell MCD or is this an opportunity to purchase shares? Are you a trader or an investor?

I look at uncertainty as opportunity. MCD had a lousy third quarter. So what? The question really becomes whether or not you believe this company will be selling more of its products to more people around the world 10 years from now as the global population grows and as MCD enters new markets. That’s really the question one should be asking oneself.

Whenever I decide to invest some of my hard earned capital with a company I plan on holding on to those shares forever. As long as the company continues to behave in a way that rewards loyal long-term shareholders and raise its dividends at a comfortable pace (usually a pace that exceeds inflation) then why would I sell shares? Are people still going to need eat next year and the following year and every year thereafter?  Of course. Are a large number of these people going to choose McDonald’s? You betcha.

McDonald’s will continue to sell its products to consumers here at home and abroad as it always has, and it will continue to share that success with shareholders. It will continue to innovate with new products, even as competitors copy them, and McDonald’s will continue to spread its brand name food to all corners of the world.

McDonald’s and its almost 5% drop on Friday is but just one example where uncertainty and fear creates opportunity for the long-term investor. As short sighted traders and market participants that trade on trends move out of solid blue chips that fail to meet some obscure analyst’s predictions for three-month performance, this is the time for long-term investors to buy up these shares and lock in attractive long-term prices with great entry yields. For instance, MCD now yields a full 3.47%! Or, you could lock up your money for a decade with a 10-year treasury that yields less than half with fully no chance of capital appreciation. The choice is yours.

How about you? Do you see uncertainty and fear as opportunity?

Full Disclosure: Long MCD

Thanks for reading.

Photo Credit: FreeDigitalPhotos.net

Comments

  1. says

    Totally agree, and I follow the same investment strategy as you – be greedy when others are fearful (as long as fundamentals remain sound).

    Similarly, my philosophy has always been to accumulate and build a passive income stream. I’ve never liked selling, so trading is definitely not for me. Since I am trying to achieve early FI, it only makes sense to enter the markets when prices are low – I am in an arms race to acquire as many shares as I possibly can.

    After all, it’s not the price of the share, but the quantity you own that determines your dividend payout. So, the more shares you can buy, the better.

    For long term investors, we salivate whenever the market over-reacts and gives us discounted buying opportunities. The challenge is partitioning out the capital so that we will always have some in reserve to take advantage of the dips.

    Last October and November were great times to buy. Looks like we might see the same again this year.

    Happy hunting!

    • says

      FI Fighter,

      I agree with you!

      It’s definitely advantageous for the long-term investor to be greedy when others are fearful, provided that the fundamentals are solid.

      I do find trouble sometimes allocating capital for long-term opportunities at attractive prices, while still have a little dry powder in the tank for large corrections. The “partitioning” as you put it is different for all of us individual investors, as some like to have larger portions of their capital invested. Personally, I like to have a couple grand sitting around that can be used to really strike if I feel that an opportunity is egregious.

      Happy hunting to you too, my friend. I do hope the market remains volatile into early November. I have some capital that I could deploy now, but I’m currently searching for a frugal mode of transportation as the bus system here in Sarasota continues to disappoint with late pickups or no-shows. So, this is currently keeping me from buying any more equities right now.

      Best wishes!

    • says

      Speaking of market noise, this morning CAT shares sold off around 1.5% after their earnings release and then within 30 min were trading for a 1.5% gain from the open. I love earnings season because it allows long term investors the chance to catch a quick sell-off for no real reason.

  2. says

    I agree that having a long-term view is best when investing in the stock market. If this view is taken, then the ups and downs that are normal within shorter periods do not have to stress the investor out so much. Of course large declines in the market are never easy to deal with psychologically, but the long-term investor can look at history and feel secure that better times will follow.

    • says

      Mary,

      I agree that large declines in the market are never easy to deal with psychologically, but as you point out one should take solace in the fact that the market will eventually return to its mean. It’s that historical fact in your back pocket that may allow you to stay calm and enter the fire with a smile.

      Best regards.

  3. says

    Nice post, DM. I agree that an investor needs to judge a company on its long-term prospects, not on what happened over a three-month period. MCD is the dominant low-cost restaurant in the world and it is likely to hold that position for years to come.

    I hope the good opportunities that are cropping up will still be around at the start of November, when I’ll have new capital to invest. In the meantime, I’ll just continue to watch the earnings reports come in.

    • says

      DGM,

      Thanks for stopping by.

      I concur completely. It’s rather fortunate for long-term investors that the market likes to judge companies on such short-term performance numbers, rather than fundamental merits and long-term prospects.

      I hope opportunities continue into November as well!

      Best wishes.

  4. says

    long MCD too since a good while. I will wait until they come down to 81.– or lower and add. The 81.– target is based on FastGraphs or DrawFastGraphs. For a miser 8 $ per month you have some good earnings graphs and other fundamental graphs that I find rather useful ! Let me know what you may think of it. Take care everybody

    • says

      Aspenhawk,

      I certainly hope MCD goes down to $81 a share, and if it does I’ll be backing up the truck. I don’t know if we’ll see that, but I could see MCD seeing downward pressure into the mid-$80′s. Of course, it could just as well bounce right back to above $90. The market is impossible to predict, and that’s why I stick to buying quality at an attractive long-term price.

      Take care!

    • says

      ADY,

      Thanks for stopping by.

      I hope MCD drops to those levels. If it does drop down to the low $80′s then I will certainly be buying as much as I can. That would be an excellent price for this stock, and would be yielding almost 4% at that point. We can only hope!

      Best regards.

  5. Shopteacher says

    It sounds like many of you have lots more experience watching these kinds of drops. I too would love to see low 80′s!! Anyone care to give odds of that happening based on their prior experience? Fifty fifty to go right back up as compared to dropping more?

    • chris says

      Speaking of drops…I have a question that maybe others have insights?

      I got introduced to a slick Money Manager about 15 years ago when I got my first real job. He convinced my wife and I that we should have $100 pulled out of our check each month to go to a variable annuity with Security Benefit. After putting in $18,200 over 15 years our current balance is only $19400. Now that I have been studying investments I now know this was a bad deal. I always read the qtly statements and never saw a fee…recently I came to find out that it was hidden in the prospectus.I know.I know. What an idiot I was… :(.

      In the past 3 years we have set a goal to be semi retired by mid 2014 and like many of you taken matters into our own hands.We have always been pretty frugal but we first tightened our budget for our family of 5, paid off all debt and mortgage and have div investments worth about $90K on an income of about$75K. We feel pretty good about that.

      Can someone give me their opinion on this idea? Am I crazy to pull all that pretax money out of the annuity, take the tax hit and put it in div post tax stocks? I could go to a Financial advisor but I don’t trust those son of %#@*es anymore!!!

      Any help would be much appreciated!

    • says

      Shopteacher,

      It’s quite simply impossible to predict whether or not MCD will spring right back up or fall further. I don’t really worry about trying. I rather focus on finding a suitable fair value range and trying to buy either at that level or as far below it as possible. This type of thinking, and focusing on investing in the business operations for the long-term, really alleviates one of the stress that market cycles can induce.

      Hope that helps.

      Best wishes!

    • says

      Chris,

      Sorry to hear of your troubles. Annuities, in my humble opinion, are a sub-par investment class. I can’t see any reason that I would personally invest some of my capital into such an investment.

      Hope this situation works out best for you.

      Take care!

  6. says

    I don’t see any fundamental problems with McDonald’s. The recent negative news is a positive in my book since the shares now trade at lower prices. News will not always be positive, this is normal and I’m not worried. I’m long MCD and am currently considering adding to my position. I’m also looking at APD and SBSI.

    • says

      Compounding Income,

      I agree. The fundamentals haven’t changed in three months, and with a global behemoth like MCD it would take a lot longer than three months for things to drastically change anyway (outside a black swan event).

      I definitely look at times like this as an opportunity to scoop shares for less than they were selling for just a week ago. Still the same company, still selling Big Macs and Coke’s and still paying out a solid dividend. I’m lovin’ it!

      Nice choices there. I’ve also had my eye on increasing my SBSI holdings.

      Best wishes.

    • says

      shopteacher,

      I find a lot to like with IRA’s, specifically the ROTH.

      However, I invest 100% of my money in taxable accounts. This is mainly because I plan on using the income my investments throw off (dividends) at a relatively early age (40). If I wasn’t trying to retire, or become 100% financially independent, at such a young age I would strongly consider maxing out a ROTH and investing the difference in taxable accounts.

      To each their own.

      Best regards.

  7. says

    Looking at MCD I see lots of future growth overseas outweighing a mildly disappointing quarter. Probably a decent buying opportunity.

    Lots of the other comments on this tread and other posts talk about large cap US stocks that derive much of their future growth from overseas.

    DM, have you looked at diversifying internationally through ADRs or ETFs such as IDV or DVYA? I especially like IDV at these levels with 60% of the holdings in European companies. I see them as extremely undervalued especially compared to US Dividend stocks.

    • says

      Luke,

      Thanks for stopping by.

      I agree with you. The entrance into new markets abroad will fuel growth for the next decade and then some. The great thing is that MCD doesn’t need acquisitions, but can grow quite well organically with innovation. The new McCafe line is a good example of that.

      I don’t invest in any ETF’s, but I have looked at ADR’s substantially. Up until recently I was invested in two foreign companies, but recently sold my Total S.A. (TOT) holdings due to lack of dividend growth. I still hold Vodafone (VOD) in my portfolio. I like many other foreign companies, and Unilever and Nestle are at the top of that list.

      Best wishes!

  8. says

    I dont own any MCD stock, but I am considering dipping a toe into it. Although MCD looks like a monopoly and even acts like one, that doesnt mean it really is. MCD has very real, competent competition. I like the company though, and the products:}.

    • says

      High Yield Soldier,

      I find MCD attractive at these levels, and would gladly add to my position if it continues weakness here.

      They definitely have very strong and competent competition, especially YUM. WEN has also been coming on strong, and I think their product has improved greatly from what was already a pretty strong product.

      I think the one thing that MCD does well is value. They really have the value market cornered, as I can think of really nowhere else that provides such a good product for such a low price. The McDouble is a good example of this.

      Best regards.

  9. says

    Hard to go wrong with this stock, esp at a yield of over 3%. You are right to hit on the value aspect, because there are millions of Americans right now looking to save money any way they can.

  10. Anonymous says

    Mantra
    With the market closed for two days I am reminded of some other sage advice from Mr. Buffett. I am paraphrasing, but he said he buys stock in companies that he would not mind owing if the stock market closed for the next 5-10 years.
    Scott

    • says

      Scott,

      Great point there! I agree with that advice. If you are unsure whether or not that company will be profitable and solvent in a decade then you should definitely be investing your capital elsewhere. After ratios, dividends, and all the research in the world it really comes down to things that simple: is this company likely to be around 10 years from now?

      Good stuff!

      Take care.

  11. says

    I recently saw a interest rate CD at chase bank thats jp morgan chase for 1.2 percent for ten years. I thought my eyesight was bad but when I looked again it really was 1.2 percent for ten years. The situation for seniors is serious because they are earning almost nothing on their saving. I even noticed that ishares intermediate term investment grade corporate bond exchange traded fund pays just 3.30 percent.

    • says

      Financial Directory,

      The fixed income market is tough, no doubt about it. The Fed is making sure of that…to encourage borrowing they are keeping rates low. This is pushing some investors into equities, which is unfortunate for value investors like us. I hold no fixed income right now because of this. Hopefully as I get closer to financial independence yields will rise substantially and I’ll be able to hold some long-term bonds at that time.

      Best wishes!

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