What to Do if the Federal Reserve Slows Down Bond Purchases
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The markets have been in turmoil recently due to a few factors including speculation that the Federal Reserve, will taper or reduce its bond buying program.
On the last day of spring the Dow dropped over 300 points, the biggest one-day decline in nearly two years, after the central bank's chairman, Ben Bernanke, announced that the economy is improving enough that the Fed could ease off the pedal sooner than expected.
What should the individual investor do?
My answer would be to ignore the crowd and the big institutions, which are busily trying to time the market and sell off holdings in reaction to short term monetary policy, a tact that seldom works. If you're in for the long term, like you should be, stay put or even add to your portfolio. There might be a few bargains around now.
Look for businesses with strong fundamentals. Just because the Fed has decided that the economy doesn't need as much monetary help (it probably needs a lot of fiscal assistance but that's a different story) the underlying strength of great companies will not be negatively affected by a reduction in bond purchases by central banks.
One company with solid stats is Boston Beer (NYSE: SAM), brewer of Samuel Adams Boston lager and many other types of beer. It also distributes Twisted Tea. The company has a fantastic balance sheet with zero long-term debt, a competent management team led by founder and Chairman Jim Koch, strong revenue and earnings growth, and plenty of cash flow to finance their R&D efforts to identify the next great product. The Boston Beer facility in the Jamaica Plain section of Boston is where the company master brewers cook up their tasty suds. It is also open to the public for tours and a socially responsible sampling of the product at the end.
Home sweet home
The economy is improving, albeit slower than desired, and more people are working and buying houses and associated items. Look to the real estate industry for growth, unless rising mortgage rates put a damper on things.
One company, with less interest rate exposure than some of the more traditional plays, is Trulia (NYSE: TRLA), an online real estate information services site. You can browse listings for homes to buy or rent in your area, check out mortgage rates, determine how much house you can afford and share photos of properties via social media.
Trulia went public last year and is starting to show signs of life. The company is projected to grow revenue at a brisk pace over the next few years and should begin to make money later this year. A patient long term investor will be rewarded.
Drill, drill, drill
A growing economy requires energy. Oil and natural gas are needed to provide the fuel needed to run businesses, heat and cool newly purchased homes and propel aircraft, trains, trucks and cars.
Look at a major integrated oil and gas business that has a lot going for it, like Chevron (NYSE: CVX), ranked as the world's ninth biggest company by market cap.
Chevron plans to focus on the upstream or production side of the business, which tends to have higher margins than the downstream or retail segment. The company will benefit from improved extraction technologies in hydraulic fracturing and horizontal and deep ocean drilling. It is also expanding its involvement in natural gas liquids by investing in LNG exporting.
All of the activity should mean that earnings and cash flow will grow, at least moderately, in the future, and the dividend, which has been increased every year for the past 25 at a compounded annual rate of 7.5%, will continue going higher. The company currently pays $1.00 per share owned. The yield is about 3.4%.
No matter where interest rates go or how much money gets printed, consumers are still going to need certain items like diapers, laundry detergent, deodorant and shaving cream and razors on a consistent basis.
Companies that sell those items, like Procter & Gamble (NYSE: PG), can expect to pull in mountains of cash week after week, month after month and year after year. After funding operations and R&D, expect P&G to return some of that cash to investors in the form of dividends and stock buybacks. The company has been paying a dividend since 1891 and increased it every year since 1956. It currently pays 60 cents per share and the stock yields 3.2% right now. Procter & Gamble has spent over $15 billion and decreased share count by 10% over the past five years.
After a recent shakeup in the C-suite designed to reverse a recent softening in growth, expect the company to revert to its old ways and allow that dividend to keep flowing and growing down the road. The setback was temporary.
A famous line in the movie Wizard of Oz was: "Pay no attention to that man behind the curtain."
A similar line should be uttered today: "Pay no attention to that man at the Federal Reserve."
Instead look at a company with strong fundamentals like Boston Beer, one serving a growing real estate market such as Truila, a big hitter in energy like Chevron and a cash flow stalwart like Procter & Gamble.
Boston Beer's Samuel Adams brand helped to redefine beer and kick off the craft beer revolution in the United States. Success breeds competition, though, and while just a few years ago Boston Beer had claim over most of the craft beer shelf, today the field is crowded. Can Boston Beer rise above the rest, or will it be squeezed between small local breweries on one side and global beer giants on the other? To help you decide, we've compiled a premium research report filled with everything you need to know about Boston Beer's risks and opportunities. Just click here now to find out whether Boston Beer is a buy today.
Mark Morelli owns shares of Procter & Gamble and Boston Beer. The Motley Fool recommends Boston Beer, Chevron, and Procter & Gamble. The Motley Fool owns shares of Boston Beer. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!