Two decades ago, everyone was making money from the stock market. There was a boom, and some of the best stocks were in the technology sector, mostly due to the proliferation of the Internet. You didn’t even need to own the best stocks; just owning the index was a profitable investment strategy. Then, the best stocks and the rest of the market came apart, because valuations got too extreme for the amount of earnings being generated. Many companies in the technology sector are still today recovering from the stock market bubble that burst.
Take Intel Corporation (NASDAQ/INTC), for example. This company is still growing its revenues and earnings, but what used to be one of the market’s best stocks turned out to be a big dud. The company’s stock price hasn’t done anything for years. In fact, Intel’s stock market price on a split-adjusted basis is the same now as it was in November 1998. That’s 13 1/2 years of dividend payments, but no bankable capital appreciation for long-term holders of the shares.
Another company with a similar story is Cisco Systems, Inc. (NASDAQ/CSCO), which is now trading at the same split-adjusted price as in October 2008. Even if the company’s dividend payments covered the inflation rate, if you still owned the stock from that time, you wouldn’t have made a dime.
The notion that long-term investing in the stock market is the only way to go is a total bust as far as I’m concerned. Long-term investing works—but only if you own the right businesses at the right time during the business cycle. Things happen; industries change and so do investor expectations. Just like the business cycle, the best stocks in any given stock market environment are going to change.
Compared to the best stocks in the 1990s, a lot of money was made over the last 12 years from companies like railroad Union Pacific Corporation (NYSE/UNP) and consumer goods provider Colgate-Palmolive Company (NYSE/CL). Some of the best stocks in the stock market over the last few years have been old-school, blue-chip names that are known for their conservative management. International Business Machines Corporation (NYSE/IBM) and The Procter & Gamble Company (NYSE/PG) come to mind. (See Dividend Increases Soar as Companies Return Excess Cash.)
All the shocks the stock market experienced over the last dozen years serve to remind us that the business cycle is very real and, if you’re on the wrong side of it, you’d better be prepared to lose money (and not just on the stock market). Right now, the U.S. economy is in the process of stabilizing itself after a major housing bubble. The best stocks currently are the ones that pay high dividends. I think the foundation is being set for a new, upward business cycle in a couple years’ time. The U.S. economy may experience a recession beforehand and there will be cracks in the eurozone. But interest rates continue to be artificially low and, eventually, the U.S. economy is going to experience a major acceleration. When this happens, the next business cycle will bring about one major investment theme: price inflation.
Next year or the year after is probably going to be a great new entry point in the stock market and I think the best stocks for the rest of this decade will be those that benefit from inflation, which is simmering, just waiting to boil over. Now would be a good time to be looking for the best stocks that will be the new market leaders.