The Disciplined Dividend Investor: 1/10/08

Economics

Politics

Domestic

International War Against Radical Islam

The Market

Technical

A couple of points:

(1) to me yesterday’s rally was a relief of sorts but it still felt like just a short covering rally in an oversold Market; certainly there is no reason to think otherwise unless stocks trade above DJIA 12800 [S&P 1419],

(2) that said, prices did recover enough to close above the November intra day lows, which in my way of thinking calls into question whether Tuesday’s close below those levels actually constituted a breach,

(3) for me this constitutes something of a short term technical dilemma. The good news is that it is one of those situations that will get resolved quickly; so on a short term technical basis, I am watching for a move either above DJIA 12800 [S&P 1419] or below DJIA 12709 [S&P 1406] as an indication of the direction of price movement.

Fundamental

As long time subscribers know when stock prices appear to be at extremes, I trot out my internal indicator: the ratio of stocks on the Buy Lists versus the stocks in their Sell Half Range. One would think that at present that ratio would be flashing a Buy signal (which in this case would be a large number of stocks on the Buy list relative to the number in their Sell Half Range)--it certainly did last August when stock prices were near current levels. Unfortunately, it isn’t this time and the reason is that so many stocks that have entered their Buy Value Range have just kept declining through the lower boundary of that Range and hence been Removed from the Buy Lists.

When this phenomena happens, my first inclination is to look at my Valuation Model on the thought that I have missed something fundamental. And to be sure, the last couple of weeks I have been continuously reviewing the financials of companies falling below their Buy Value Ranges. But aside from some of the financial stocks whose underlying companies are undergoing a significant deterioration in their balance sheets and earnings power, my studies have simply largely confirmed the original calculations of the Model--which means that either all those stocks that have gone on our Buy Lists then been summarily Removed as the stock prices continued to drop are getting more undervalued or I am missing some giant truth that other investors have grasped.

For the moment I am going to give myself (and the Valuation Model) the benefit of the doubt primarily because this same pattern of stock price behavior relative to company fundamentals is so similar to what occurred in 2000-2001. If that is the case, then (1) we likely have more downside, (2) the stocks of a lot of good quality companies will become unreasonably undervalued, (3) the best strategy is to not try to be a hero and catch the falling knife no matter how cheap stocks appear, (4) when the flush comes, there will be sufficient time and space to Buy stocks we want to own at relatively inexpensive prices even though we won’t likely catch the bottom.

Subscriber Alert

The stock prices of Abbott Labs (ABT-$60) and Eli Lilly (LLY-$56) have risen above the upper boundary of their respective Buy Value Ranges. Accordingly, they are being Removed from the Dividend Growth Buy List. The Dividend Growth Portfolio will continue to Hold these stocks.

http://finance.yahoo.com/q?s=ABT

http://finance.yahoo.com/q?s=LLY

The stock price of Fortune Brands (FO-$68) has fallen below the lower boundary of its Buy Value Range. Therefore, it is being Removed from the Dividend Growth Buy List. The Dividend Growth Portfolio never Bought this stock, so no action is required.

http://finance.yahoo.com/q?s=FO

On the Market open this morning:

(1) the Dividend Growth Portfolio will Sell the remaining shares in its Holding of Illinois Tool Works (ITW-$48),

http://finance.yahoo.com/q?s=ITW

(2) the Aggressive Growth Portfolio will Sell the remaining shares in its Holdings of Reliance Steel (RS-$45) and Simpson Manufacturing (SSD-$24) and a second one third of its position in Fastenal (FAST-$36).

http://finance.yahoo.com/q?s=RS

http://finance.yahoo.com/q?s=SSD

http://finance.yahoo.com/q?s=FAST

The Dividend Growth Buy List

Company Close 1/9 Buy Value Range

Johnson & Johnson $67.80 $60-69

MDU Resources 27.66 25-29

3M 80.19 80-92

Linear Technology 30.45 29-32

General Electric 35.80 35-39

Meredith Corp 53.13 49-56

T. Rowe Price 50.41 47-54