When you buy stocks, you trade your cash for a chunk of a business. The lower the price of the shares you're buying, the more of them you can pick up for your money. Since the true value of those shares is based on the performance of the business behind them and not the random movements of the market, long-term investors should love market crashes.
After all, would you rather:
Invest $100 to get $50 worth of future business value, or
Invest $50 to get $100 worth of future business value?
All else being equal, market crashes are what provide you the opportunity to get more business value for the money you're investing.
What about the stocks I already own?
Of course, in an indiscriminate market crash, the shares you already own will fall along with the ones you're looking to buy. Unless you've got an urgent need to sell those, though, does it really matter? The crash has no impact on the real value of the business underlying those stocks. Indeed, the crash just might be providing you the opportunity to buy more shares of a company you already thought highly enough of to own.
That said, it's far easier said than done to watch your apparent net worth crumble in a market crash while stoically searching out ways to hand over even more cash to buy those falling stocks. In fact, it's darn near impossible to do, unless you've got both a stable financial foundation and the mind-set of a value investor in the best traditions of Benjamin Graham and Warren Buffett.
Mind over matter
Having a stable financial foundation matters because the one thing that can ruin your best investing plans is being required to sell your shares while they're busy crashing for no good reason. With enough cash in the bank to handle life's little surprises and enough insurance to cover the bigger ones, you can dramatically reduce the potential need to sell your shares to cover an unexpected event.
With that foundation firmly in place, you can then turn your attention toward what you're able to buy for the money you're putting to work -- the essence of value investing. Take a look at the companies in this table, for instance:
Dividend Payout Ratio
5-Year Dividend CAGR
Consensus Long-Term Growth Rate
How Far It Has Fallen From Its 52-Week High
Hewlett-Packard (NYS: HPQ)
Teva Pharmaceutical (NAS: TEVA)
Johnson Controls (NYS: JCI)
Aflac (NYS: AFL)
Applied Materials (NAS: AMAT)
Stanley Black & Decker (NYS: SWK)
Arch Coal (NYS: ACI)
Source: Capital IQ, a division of Standard and Poor's, as of Sept. 22.
They've all lost at least a third of their market cap vs. their 52-week highs, yet they have:
Track records of directly rewarding their shareholders with rising though still well-covered dividends
Decent balance sheets, as evidenced by debt-to-equity ratios below 1
Solid, long-run potential growth prospects.
While that doesn't make them automatic buys, the combination of shareholder-friendly behavior, solid balance sheets, decent prospects, and a lowered market price should attract value investors' attention. Nevertheless, for a stock to fall that far, that fast often indicates that there are very real risks that had not been previously fully priced into their shares.
So what's wrong with them?
Hewlett-Packard, for instance, may be one of the most storied names in the technology business, but it's going through a world of hurt. Its CEO, Leo Apotheker, is on the way out, with Meg Whitman stepping in as the company struggles to reinvent itself away from PCs and toward cheap mobile computing and powerful servers.
Teva is feeling the pain of an adverse court ruling that is holding it responsible for cases of hepatitis caused by tainted vials of medication. For a business that's as reliant on quality controls as a pharmaceutical business, the hit to Teva's reputation matters as much as the specific settlement itself.
Johnson Controls' shares have been falling since July, driven in part due to lead poisoning problems that China is connecting to its battery unit. Aflac's debt rating has been cut by Moody's for its "risk appetite," which is hardly what investors -- or policyholders, for that matter -- want to see from an insurance company.
Applied Materials' rating has been cut to "sell" by Goldman Sachs, driven by yet another cyclical glut in semiconductor capacity. That's part of the industry, for sure, but it still impacts the company's ability to be consistently profitable.
Arch Coal's shares have fallen with the price of other energy sources, at least in part on fears of weakening global economy. And Stanley Black & Decker may owe some of its pressure to a report that calls out its lavish executive compensation package.
The future is what counts
These companies are currently viewed as somewhat damaged goods, due to reasons both within and out of their control. Still, the question of whether they're worth owning now depends on their prospects for the future, rather than their slip-ups in the past. After all, the market has a short memory, and improved performance in the future will quickly erase today's punishment for perceived -- or potentially even real -- wrongdoings.
If you think their futures are bright in spite of their current troubles, today's lowered prices certainly give you more for your money than you would have gotten at earlier, higher prices. If you're at all inclined toward value investing, that should bring a smile to your face.
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At the time thisarticle was published At the time of publication, Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. The Motley Fool owns shares of Aflac, Applied Materials, and Teva Pharmaceutical. Motley Fool newsletter services have recommended buying shares of Aflac and Teva Pharmaceutical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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