Many investors and economists will tell you to “buy the dip,” but few of them will also say to “buy the crash.” Oftentimes investors and economists go quiet somewhere between a 5-per-cent and 25-per-cent downdraft, disappearing from public view or expressing hesitation about buying into the market. Instead of chipping away and adding to positions during sell-offs, they are beset by panic, paralysis and fear. In the process, they miss the opportunity of picking up stocks on the cheap, forgetting that one, three, five and 10 years out, equities are often higher.
Today, major U.S. indexes are in bear markets once again. Canadian benchmarks do not look much better, and September was the worst month for equity investors since March, 2020. Momentum is poor, volatility is high and investor sentiment is low. In the background, however, valuations are getting better, and insiders are starting to buy their own stock. It is during downturns like this when plucky long-term investors should consider deploying capital.
During bull markets, many investors will dollar-cost average – that is, invest equal amounts of money at regular intervals regardless of the stock price. To me, this is foolish, as it guarantees buying shares during overvalued conditions, and removes the possibility of buying more stocks on the cheap when the next inevitable downturn occurs. Instead, I prefer to invest cautiously in new or existing stakes during periods of market optimism, sell positions where I can, and build up cash.
During sell-offs, I am much more aggressive, and regularly deploy capital in new and existing positions. While this approach to buying during bear markets is not exactly dollar-cost averaging, it does consistently deploy capital in a similar manner. By employing this strategy, I am trying to balance the possibility of the index moving lower with the probability I will not be able to time the bottom. This strategy helps me avoid the headlines, the negativity and the paralysis that can go along with investing in a downturn. To do this effectively, it is important to go into it with a research list, review your watch list often, and focus on corporations with balance-sheet strength, low valuations and good insider alignment.
Fresh Del Monte Produce Inc. (FDP-N) is one of about a dozen names I have added to over the past few months and is a stock we own at Contra the Heard Investment Letter. Originally purchased in June at US$24.26, this vertically integrated fresh produce company has a widely recognized brand across North America and globally. If you are keeping up with your fruits and vegetables, chances are you have some of their bananas, pineapples or other foods in your kitchen.
The rationale for buying the stock rested on a handful of factors. First and foremost, FDP was discounted versus peers, the market, and where it has traded in the past. Moreover, it was a consistent operator. Over the past decade, revenues have edged higher, net income has been stable, and free cash flows have been positive. This has allowed management to pursue a respectable dividend, and a share repurchase program that has seen the shares outstanding fall from 58 million in 2012 to 47.7 million in the latest quarter. Behind the scenes, insider alignment appears high. According to annual disclosures filed with the U.S. Securities and Exchange Commission, Mohammad Abu-Ghazaleh, the company’s chief executive officer, owns 29.8 per cent of shares outstanding, while all insiders owned 37 per cent. Finally, agricultural companies and soft commodities tend to do well during inflationary periods because, after all, everybody must eat.
Since we purchased the shares, the inflationary picture has deteriorated, which affected their latest quarterly results. The top line was up, but the bottom line fell by more than half. Despite the choppy results, the outlook is decent. In an added twist, two private-equity firms have expressed interest in taking FDP private. It is unclear whether any deal will happen and at what price such a transaction may occur – especially given that the book value of almost US$39 is well below the current stock price around US$24. Nevertheless, it is good to see multiple parties wanting in on owning the name. Perhaps there will be a bidding war? It is a long shot, but you never know.
The market, and Fresh Del Monte, could continue to fall, but the company is one of many positions I have been happy to purchase and/or add to during the downturns that have characterized 2022. If you are an investor who was happy buying the dip but now have cold feet buying the crash, ask yourself why. If you are a long-term investor, take a big breath, remind yourself that markets are cyclical, and remember that equities tend to go up over time. For me personally, this means that the lower things go, the more I will buy, and the more I will remind myself – don’t just buy the dip, buy the crash too.
Philip MacKellar is a writer for the Contra the Heard Investment Letter.