“Be fearful when others are greedy, be greedy when others are fearful” is one of the classic mottos for value investors, told by the most successful investor, Warren Buffett. Thus, investors should stay away from overall cheery market consensus. When a huge sell-off happens in the market, it is normally the time to invest. It did happen, just one day after President Barack Obama was elected to be the President of the United States of America.
It could be called the worst selloff of the year. The Dow Jones Industrial Average lost 313 points, or 3.26%, to close below 13,000. Coincidentally, when President Barack Obama was elected the first time, The Dow experienced a decrease of more than 400 points in the following day. This second time, two Dow Jones’ stocks that were hit the most, were two mega-banks, Bank of America (NYSE: BAC) and JP Morgan Chase (NYSE: JPM). BAC plunged 7.14%, from $9.94 to $9.23 per share. This loss seems to be nothing compared to its 66% year-to-date gain for its shareholders. BAC is valued at 0.5x its book value and the dividend yield is 0.4%. JP Morgan lost 5.6%, and settled at $40.48 per share. Year-to-date, JP Morgan has also had a nice run, but less than that of BAC, with a 21.74% gain. JP Morgan is valued at 0.8x P/B and the dividend yield is 2.8%. So the banking sector has led Dow Jones in the overall decline.
Indeed, the banking sector got hit the most, as it is the leading industry of all economic activities. Then the overall decline came to the energy sector. The biggest loser in the S&P 500 during the day was a metallurgical coal supplier and exporter Alpha Natural Resources(NYSE: ANR). ANR dropped 12.16%, from $9.62 to $8.45 per share. Year-to-date, Alpha’s investors are not happy, as the company has lost nearly 62%. With more than 220 million shares outstanding, the total market capitalization of Alpha is $1.86 billion. In addition, the largest coal producer in the US, Peabody Energy, couldn’t escape this bear. It plunged 9.64% to $26.24 within a day. The total market capitalization for this coal producer is $7.04 billion. The stock seems to be cheaper after the fall, of only 7.7x P/E and 1.2x P/B, along with the dividend yield of 1.3%. However, it is expected that the coal industry in general would receive much tighter regulation under Obama’s administration. Furthermore, the demand for coal would be less due to the fact that power generation companies could switch to cheaper and cleaner alternative, the natural gas.
Bill Gross of Pimco told CNBC on Wednesday: “A newly re-elected President Barack Obama will push for higher taxes—including a dividend-tax hike that will cause a substantial drop in stocks.” He reasoned that higher dividend taxes would discourage risk-adverse investors invest for dividends. The rise of 15% to 25% would make the stock market fall for another 5% to 10%. In addition, following the New York Times: “The tax increases and spending cuts, known as the fiscal cliff, could push the economy into recession in 2013, economists say they fear.”
Not all stocks were in the red; the majority of healthcare operator stocks were up significantly.Vanguard Health System (NYSE: VHS) was up 5.3% to $11.13 per share. This stock has been rewarding investors, climbing from its low of $7.35 in June. At the current price, the market capitalization is $840 million. The market is valuing 9.5x P/E and 2.8x P/B. HCA Holdings (NYSE: HCA) was up as high as 9.44% to $33.85 per share. It was a big hospital operator with 163 hospitals. The market capitalization is $14.92 billion. Even with the daily significant increase, HCA is trading at only 4.8x P/E. Its P/B valuation is not valid as it has negative equity. The firm has nearly $27 billion in debt out of an equivalent amount in total assets. Investors’ expectations are Affordable Care Act will push up those companies’ net income up.
Overall, the major selloff is just an emotional factor, it was reported by Bespoke Investment Group that since 1990, the market has gone down 13 times and up 15 times one day after a new election. It could be an opportunity to invest in the sell-off. Nevertheless, investors should look deeper at the fundamentals of each company to determine its attractiveness compared to the price offered in the stock market.