5 Bottom-Up Bargains

By the end of the 1990s, chasing growth stocks’ momentum was many investors’ strategy of choice. Companies with reliable revenue and low debt had enjoyed their best run in history. But by that time, few paid attention to dividends or value, which had been popular early in the decade when fear rather than greed was the dominant market emotion.

The good news is that we’re about as far away from that kind of bubble as is possible. There’s still value to be had in many corners, but after nearly four years of good times, you won’t find it unless you take a bottom-up approach—i.e., scrutinize companies’ underlying businesses on their own merits.

The best values are always in unloved sectors that investors have abandoned because they look bad from 30,000 feet. Sector affinity and aversion have become particularly pronounced in recent years, as exchange traded funds have proliferated. Stocks in a sector get bid up and sold off in unison to a much greater extent than was possible in the past.

One sector that’s taking hits now is energy, the subject of our second article. But I see many positive trends in energy, which is why I’m adding a new energy company to the Income Portfolio: Super oil Total (NYSE:TOT).

Energy has been in an uptrend since 1998, when oil prices bottomed at less than $10 a barrel and natural gas last sold for less than a buck per million British Thermal Units. However, global growth worries and the North American shale boom have raised doubts about energy companies from wellhead to burner tip.

Energy still has a lot left in the tank. With large and reliable companies such as Total underwater for the year and featuring growing yields of 6% and up, you get plenty of bang for the buck while still playing it safe.

The 2008 crash provides the best possible crucible for determining companies’ reliability and safety in the worst possible environment. Nearly every company’s stock lost ground during the worst of that crisis. But companies that held it together as businesses then are very solid bets to do so in a future crash.

As noted above, revenue reliability comes in handy during a crisis. Some investors (as well as regulators) were surprised that regulated gas, electric, and water utilities demonstrated this reliability in 2008. But their strengths won’t be so easy to ignore the next time around, especially since nearly all have spent the last four years cutting debt and operating risk.