Zacks.com: Analyst Blog

 
The following article focuses on the following stocks: ExxonMobil (XOM), ConocoPhillips (COP) and Pfizer (PFE).

As I write this, the Dow is at 8,216 and the S&P 500 is at 866.  Six years ago, in 2002, they bottomed out at 7,286 and 800, respectively.  The way things have been going lately, we could reach those levels within a few days.  The S&P is now down almost 45% from a year ago when it topped out at 1,565.  The conventional definition of a bear market is a decline of over 20%, so we have had a bear market on top of a bear market. 

There are only three comparable declines in history: from 1929 to 1931, the 1974-75 bear market, and the 2000-02 dot.com crash.  The market has not seemed very discriminating in what it trashes.  Good companies with strong balance sheets and products that people need are going down along with companies with weak balance sheets selling things that are frivolous or easily deferred. 

Yes, we are in for one heck of a nasty recession, and if things in the credit market don't straighten up soon, perhaps even a depression.  The indications out of the credit markets are that things are still continuing to deteriorate.  In the commercial paper market, 30-day A2/P2 non-financial paper, the type issued by the vast majority of medium to larger firms, is trading for 4.59% (459 basis points) -- more than the truly gilt-edged stuff of the same maturity. 

Under normal conditions, the spread is more like 0.20% (20 basis points).  The spread between Treasury bills and what banks lend to each other at (the TED spread) is over 4.0% and has increased just about every day for a week.  This is a level that has never been seen before -- not even close. Companies are finding it very hard to get any sort of short term credit; working capital is just not working.  Firms that do not have significant cash on hand, and those with lumpy cash flows will have a very hard time doing basic things like ordering supplies and inventories and making payrolls. 

There are even indications that banks are starting to refuse letters of credit from other banks.  That is very serious, since without letters of credit international trade cannot function.  It is the financial equivalent of a fleet of U-boats out to sink shipping.  (For more info on this, go to http://www.nakedcapitalism.com/2008/10/international-trade-seizing-up-due-to.html.)

However, the best five years to be in the stock market were not the late 1990's, they were the mid 1930's.  I'm not saying we are at a bottom yet, but clearly the stock market will turn around long before the real economy does.  Great companies are trading at valuations that a year ago would have been unthinkable. 

Do you really think that Exxon (XOM) is going to go out of business, regardless of how bad the economy gets?  Or do you think that they will be able to take all that cash that has been building up on their balance sheet and put it to work, scooping up bargains and coming out the other side stronger than ever?  Is it more likely to cut its dividend or increase it over the next five years?  Well Exxon is trading for 7.5x this years expected earnings and has a dividend yield of 2.4%, and it is one of the more expensive names in that group.  Take one step down and look at Conoco (COP) is at just 4.3x this year's earnings and is yielding 3.5%.  

It's not just in the oils, either -- take a look at some of the drug companies.  Are things really going to get so bad that people with high cholesterol stop taking Lipitor?  I honestly doubt it.  Yet Pfizer (PFE) is going for just 6.6x this years earnings and is yielding almost 8%. 

There are countless examples like this.  Can I guarantee that they have hit their low tick? Of course not.  However, there are many stocks that are dirt cheap by just about any measure.  For value investors, it is like a kid in a candy shop.

Read the full analyst report on XOM.

Read the full analyst report on COP.

Read the full analyst report on PFE.