The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage. The opinions expressed are those of the author and do not represent the views of TheStreet or its management.
By Ian Wyatt
Stocks are expensive right now.
Let me rephrase that: Large-cap stocks are expensive right now.According to John Hussman, head of the Hussman Investment Trust, the S&P 500 currently sells at a price-to-earnings ratio of about 24, based on 10-year average earnings. In his latest weekly letter, Mr. Hussman explains how he uses a cyclically adjusted measure of P/E that incorporates inflation to reach his conclusion that the S&P 500 is overvalued. According to his research, the only time that the broad market sold for 24 times earnings was in 1929, 2000, and 2008. I'll let you draw your own conclusions about entering the broad stock market at such a valuation. My point is: If we're going to find value right now, it's probably not going to be in large-cap stocks. So I recently found a small-cap agriculture stock that's selling at an extremely cheap P/E of just 11 times trailing earnings. That's inexpensive during any period, let alone during a time when the broad stock market has rallied for more than 20 months with barely a breather. I'm not saying it's time to bet against the broad market -- I wouldn't bet against a speeding train like this -- but if you're not buying value now then you're not setting yourself up for success. The company in question is a Mexican poultry producer by the name of Industrias Bachoco (IBA). It's a $1.3 billion company, founded in 1953. It went public in 1997, and as a matter of policy, has paid an annual dividend of about 20% of its net income every year except for in 2009. Here's an excerpt on the company's dividend policy from their annual report for fiscal year 2002:
"The Company has maintained as a general policy an annual dividend of 20% of last year's net income. Even though the amount or opportunity of future dividends cannot be guaranteed, Bachoco expects to pay an annual dividend to the holders of outstanding shares equal to an amount of no more than approximately 20% of the net income of the previous year."The company lost money in 2008, so it didn't pay the dividend that year in accordance with its clearly stated policy. But this year it's scheduled to pay a dividend of 2.9%. That's on news that 2010 profits were up 10% year over year from 2009.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
24/7 market commentary from Jim Cramer and 20+ veteran Wall Street gurus. Get access to the latest trading ideas on stocks, options, and ETFs as well as a real-time forum to see the pros exchanging their investment ideas.
- Jim Cramer + 20 Wall Street pros
- Intraday commentary & news
- Real-time trading forum
- Actionable trade ideas
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV