I love bear markets. I'm a greedy investor… And without bear markets, investment bargains don't happen...Without bear markets, I'd likely be out of a job. Bear markets create investment opportunities. Bull markets reduce the opportunity set and guarantee lower future returns. Bear markets are necessary, useful, and highly beneficial to a real investor. Bull markets are a curse because they lower that investor's future return potential.
... This morning, I ran a quick stock screen on Bloomberg. I was looking for companies with relatively little debt, trading at cheap multiples of free cash flow.
Here are the 20 largest names by market cap…
(Note: Enterprise value is market cap plus debt minus cash. It's the value of the business, independent of net cash. So comparing it with free cash flow shows us how cheap it is relative to the cash it's generating.)
| Short Name | |
| Microsoft | |
| Berkshire Hathaway | |
| Pfizer | |
| Cisco Systems | |
| Amgen | |
| Eli Lilly | |
| Freeport-McMoRan | |
| General Dynamics | |
| Ace LTD | |
| Corning | |
| Chubb | |
| Marathon Oil | |
| Activision Blizz | |
| Schwab (Charles) | |
| Applied Material | |
| Netapp | |
| McGraw-Hill | |
| Symantec | |
| Adobe Systems | |
| Altera |
I know a few of these companies well. But I don't know much about most of them.
For the sake of argument, let's say they're all sound, safe businesses. The average multiple of enterprise value to free cash flow is about 6.9 times. That corresponds to a yield of about 14.5%. Right now, the 10-year U.S. Treasury note is yielding just 1.8% today. This group of 20 businesses is yielding eight times more than the obligations of a bankrupt government intent on debasing its currency. Some of these companies have the safest, cash-loaded balance sheets in the world.
The choice shouldn't be difficult. Based on our little exercise, you should sell U.S. Treasurys and buy high-quality U.S. stocks, trading at single-digit multiples of free cash flow. And with the 10-year yield moving up today (and its price moving down), maybe investors are starting to wake up a little to the lousy proposition the government is offering investors.
Commodity companies tend to get pounded in bear markets. The cheapest stock on the list is Marathon Oil at less than four times trailing free cash flow. Freeport McMoRan is also fairly cheap, at 5.5 times free cash flow.
Among the four largest stocks on the list are three of our World Dominator picks – Microsoft, Berkshire Hathaway, and Cisco. All three are either paying dividends and/or buying back shares, creating huge value for remaining shareholders.
That's what I'd buy most aggressively right now – the big, safe, dirt-cheap World Dominators. I don't think the time has arrived to pile heavily into the smaller, more speculative names. I could be wrong. (And for trying to time the market, I'd deserve to be...) But I'd start slow, play it safe... and within that context, be greedy as hell.
I'll have a new addition to the World Dominating Dividend Grower list in the next issue of The 12% Letter, Stansberry Research's income-oriented letter. My research partner – the intrepid Mike Barrett – and I have narrowed it down to two possible names.
The one I like best right now has grown its dividend every year for 38 years in a row. It has grown the dividend at more than 17% per year for the last 10 years. It's the No. 1 company in its industry. It gushes free cash flow. And it's trading for around half what I think it's worth.
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