I haven't done much with the Magic Formula lately, and much of my investing is in my IRA and 401(k) now instead of my taxable Zecco account, but I do have some comments on the historical times we are living through.
Warren Buffett has advised to buy stocks in companies that you wouldn't mind holding if the stock market was shut down for a few years. I believe I have done that with my choices of O, KMR, GE, KFT, BMS, JNJ, PFE, USB, COP, PG, INTC, and MCD. In fact, I'd probably be thrilled if the prices would stabilize and I could just watch the dividends roll in! I don't think a stock market holiday is likely to happen, at least not for more than a few days.
I think it is a good time to take a breath and think about what shares are: partial ownership of a company. If you run your own business, would you sell out at a rock bottom price unless you were in a desperate situation? Would you sell your house for half what you paid if you had no trouble making your mortgage payment? Then why sell your ownership in a good business now just because someone else got in dire straits and sold their stake?
The Magic Formula has recently shown me a couple of companies that look interesting. I wouldn't take a full-size position in either one, but a small or medium position would be okay as part of a well balanced portfolio.
Cal-Maine (CALM) is the nation's largest publicly traded egg producer. 15% of America's shell eggs come from them. People will still eat eggs, no matter how dire their financial situation gets. They pay a dividend of 1/3 of their quarterly income, so they are not a steady dividend payer that can be counted on for reliable income growth. But as a small part of a diversified portfolio, I think Cal-Maine does have something to add. It is currently 2.5% annualized at $24.32/share ($0.628/share for this quarter). Their profits were hit hard by high feed costs but should improve now that feed is coming down. One potential problem: there are allegations that the major egg producers colluded to raise prices.
Freeport-McMoran Copper and Gold (FCX) mines copper, gold, and molybdenum and since the acquisition of Phelps Dodge is much more diversified. It currently yields 5.5% at $36.35/share ($2 per share annually) and has grown the dividend at a double-digit rate lately. It has traded as high as $127 in the past year and has fallen off the cliff with the commodity crash. If the emerging markets ever get back to full steam Freeport-McMoran will be there. We struck Magic Formula gold with this one before and now it is about half the price at which I sold back in April 2007. It's a better company and a better buy!
In the interests of full disclosure, I own stock in all of the above-mentioned companies.
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