2021 is here, and we all have coronavirus fatigue. With good reason. From lockdowns to mask-wearing to social distancing, the virus has taken an immeasurable toll on our lives and has done unprecedented damage to the economy.
But even with these present realities, the markets continue to provide opportunities for investors, especially if you base your decision-making on key fundamentals. During the 2008 financial crisis, venerable investor Warren Buffett wrote an op-ed piece in the New York Times about why he was still buying American equities despite their epic fall. He coined a phrase that has now become well-worn: “A simple rule dictates my buying,” he wrote. “Be fearful when others are greedy, and be greedy when others are fearful.”
At Orion Portfolio Solutions, where we analyze and offer hundreds of different strategies, we believe that different investment strategies, as long as they are disciplined, can work over time. In other words, even amidst great turmoil, savvy long-term investors can find success if they’re employing the strategies diligently. During the “coronavirus economy,” investors may find attractive stocks by sticking to these distinct strategies:
- Price-to-Sales Ratio (P/S Ratio)
- Emerging Markets and ETFs
- Dividend Investing
P/S RATIO: THE “CLEANER” METHODOLOGY
While price-to-earnings (P/E) ratios often get the headlines—with good reason—the P/S ratio is used less frequently. So it allows you to uncover bargains that other investors may not find. Since revenues or sales aren’t as affected as earnings or book value by management’s decision-making or other internal factors, the P/S ratio is viewed as a “cleaner” metric for evaluating equities.
In addition to that advantage, the valuation method rarely provides a negative or meaningless value. For example, a short-lived company loss will render a P/E ratio useless. Furthermore, revenue-based valuation measures are less erratic by nature, allowing you to effectively gauge if a stock is undervalued or overvalued—especially growth stocks that haven’t yet turned a profit or might be experiencing momentary difficulties.
When screening potential investments based on their P/S ratios, it’s critical to remember that sales don’t always equate to profits. If you hunt for companies solely using low P/S ratios, more than likely you’ll discover companies with feeble profit margins—so make sure you compare the equities you’re eyeballing to previous watermarks or competitors within their industries.
EMERGING MARKETS AND ETFS: WEIGHING RISK WITH REWARD
While the term “emerging markets” is used a little loosely in the investing world, it’s typically defined as a market segment that includes countries or regions poised to experience fast economic growth. Brazil, Russia, India, and China (aka the “BRIC” countries) serve as perfect examples of countries that have seen serious growth over the past 10 years.
Though different investors might quibble over what makes an emerging market, what’s not up for debate is the fact that the segment represents the quintessential risk/reward scenario. Investing in an emerging market at the right time may allow you to reap incredible returns. Of course, timing is always a tricky proposition for investors, and this proves more so for emerging markets since true risks are much harder to uncover.
So how do investors tap into the high-growth potential of emerging markets while mitigating the inherent political, economic, and currency risks? The answer is in exchange-traded funds, or ETFs. Similar to a mutual fund, ETFs invest in a specific slate of securities, often tracking an index like the S&P 500 or Nasdaq. The difference is ETFs are found on exchanges and trade throughout the day like a typical equity.
This makes emerging markets and ETFs a match made in heaven since you can invest in a country or a select set of countries within your chosen portfolio. Even in emerging markets diversification is important, especially since all that upside comes with built-in downside, too—so choose your ETF judiciously. Learn more about ETF investment strategies at ETF Express.
DIVIDEND INVESTING: SLOW AND STEADY WINS THE RACE
Another strategy is dividend investing. Dividend amounts, determined by a company’s board of directors, are paid out to shareholders from any earnings. Many investors use dividend yield—which is the percentage of a company’s share price that gets returned to shareholders in a given year—as a barometer of a healthy company balance sheet, and therefore a sound investment.
While dividend investing is focused on a solid history of earnings and dividend growth, positive cash flow, and sensible valuations, like all investment strategies it does have risks—two, specifically. You should first perform analysis to make sure any dividend payments aren’t eating into a company’s growth potential. Second, you should not pursue high yields since they could be signs of underlying weakness. A high payout ratio could signal dividends will be cut in the future.
Dividend investing starts with holding your targeted company’s stock on the record date, which is when the company determines the upcoming dividend payment. If you buy too late or sell too soon, you’ll simply have to wait until next time.
This strategy is popular since it works for investors of all ages. Older investors can remain in the market but create a consistent income stream during retirement if they choose high-quality, dividend-paying stocks. Dividend investing works for those with a longer time horizon, too; dividends are just reinvested, allowing you to buy more shares over time.
SAVVY INVESTING INCLUDES DIVERSIFICATION
No matter which strategies you use—whether they are P/S ratios, strategies incorporating emerging markets ETFs, dividend investing, or other approaches—always keep proper asset allocation, based on your risk tolerance, top of mind. Being overweighted based on one segment, one metric, or one strategy is rarely what savvy investors do. However, the key takeaway is that no matter how dire things seem, there are always opportunities to be found in the market. While lockdown measures may linger for at least a few more months, there’s no reason for investors to stay on the sidelines.
