Saturday, July 30, 2011

Fundamentals Dividend Growth Investment Strategy 730

The DJIA (12143) finished this week about 15.7% above Fair Value (10493) while the S&P closed (1292) basically at Fair Value (1296).

By Steve Cook
All American Investor

Equity (S&P) prices, at least as defined by our Valuation Model, have come back to Fair Value propelled by economic/political uncertainty created by a self serving western, statist political class.

Much of that is already in our Models and, hence, I view this decline as a Buying opportunity. Nevertheless, I would like to see a bit more resolution to the fiscal difficulties both here and in Europe before jumping in feet first.

The fact that stocks in general are Fairly Valued and our Buy Lists are growing as some stocks become undervalued doesn't take my focus off stocks that are suffering a significant technical breakdown. Indeed, until we know support levels will hold, this latest decline could be a precursor to something much worse. So this is a time to pay very close attention to both our Buy and Sell Discipline.

This week our Portfolios Sold one stock (SNY) that had traded into its Sell Half
Range and several others that suffered significant technical damage (MMM, LLTC,

Bottom line:
  1. our Portfolios will carry a higher cash balance than pre-financial crisis but it will be more a function of individual stock valuations and less on macro Market technical trends,
  2. we continue to include gold and foreign ETF’s in our asset mix because we continue to believe that inflation is the major long term risk. An investment in gold is an inflation hedge and holdings in other countries provide [a] a hedge against a weak dollar and [b] exposure to better growth opportunities,
  3. defense is still important.

                                                                         DJIA S&P

Current 2011 Year End Fair Value*            10760                                      1330
Fair Value as of 7/31/11 10493 1296
Close this week 12143   1292

Over Valuation vs. 7/31 Close
 5% overvalued           11017 1360
10% overvalued           11543        1425  
15% overvalued                              12066                                       1490
20% overvalued           12591 1555
Under Valuation vs. 7/31 Close
5% undervalued                               9968                  1231
10%undervalued 9443       1166                               
15%undervalued 8919                                         1101

* Just a reminder that the Year End Fair Value number is based on the long term secular growth of the earning power of productive capacity of the US economy not the near term cyclical influences. The model is now accounting for somewhat below average secular growth for the next 3 to 5 years with somewhat higher inflation.

The Portfolios and Buy Lists are up to date.

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973.  His 40 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns,  managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies.  Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.

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Original content Steve Cook All American Investor