Dividends and “Broken” asset classes may offer opportunities for rebound

In every market there are stocks which are deemed unfavorable and thus sink to low prices. Some of them have very good assets, but they are not promoted on the exchanges. Think about the present time with COVID, some stocks benefit from people staying at home, some do not. Some stocks it does not matter. A number of years ago, one of the best performing classes was Real Estate Investment Trusts or REITS, then COVID happens and people do not go to the malls and office buildings in great numbers. The malls were closed, rents are not collected and all REITS go down in price. Will there be some that are better positioned than others, yes there are. It is important to remember not all companies are the same even though they might be in the same category. If you were an manager and all your investors are asking why are you holding REITS, it is easier to say I sold some of them but I holding the best ones.

According to an article by Ian McGugan, a recent report about broken asset classes by Research Affilates LLC, a market analysis firm based in Newport Beach, California, in the past investors have done very well buying broken assets and holding as the market turns around. The report’s authors are John West and Amie Ko highlight a few examples: Business Week in August 1979 declared stocks dead as an investment. Barron’s did not like REITs in 1998. The Economist magazine said oil was too cheap at $20 in 1999. In 2000 small value stocks were dismissed and high yield bonds were being avoided in 2008.

The report says 5 years after an asset class is described as broken, they each roared back. Then they beat the broad stock market by 15%.

Linking to dividend paying stocks, if you are a value investor you are constantly examining what is out of favor and or what is broken and all the reasons why the stock should be higher. When the articles were written there were compelling reasons for saying what they did. Did the companies change or the economy change? what did the government do to encourage the asset classes to come back? The market goes through sector rotation, it is to be expected. There are often very good reasons why a stock is not in favor, as an investor if it is a profitable one, you can put it on your watch list, have patience and buy it 2 or 3 years after it is out of favor. Respect the tape or respect the market and it works for you.

There are more questions than answers, till the next time – to raising questions.

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