How to make money in a falling market

Question: The market has fallen again after a short recovery last week. It seems like this will continue for some time because there is not much buying activities in the market lately. I have some extra cash to invest and I don’t know if I should wait for the market to fall further or to buy now. Can you advise me?—Ruby Suan by e-mail

Answer: There is nothing wrong about being positive that the market will recover soon, but you also have to recognize that the general trend may have already reversed from bullish to bearish. The market has entered the bear territory after the index has fallen by over 20 percent from the record high of 7,403 to the recent low of 5,678.

I mentioned in a previous column published last January that a bull market would normally last for three to four years, and this year could be the end of the bull run since this would be the fourth year. True enough, the market peaked last May and the trend has reversed. It may take some time, probably several months, before the market starts to pick up again.

Some people who apparently are still in denial call the current downtrend a correction when in fact it is the other way around. When the general trend is downward, any market rally is considered a correction. It is temporary and short. Once the market has recovered, the downtrend continues. This is exactly what is happening now in the market.

Why has our market turned bearish despite the good fundamentals? Improving economic outlook in the United States and prospects of higher fixed income yields have attracted foreign investors to pull out of our market and send their funds back home. Without strong buying support, the market becomes highly vulnerable to selling pressure.

In the absence of massive selling, the market may move sideways on a downward bias until another set of negative developments trigger a fresh round of heavy selling. Current downtrend should initially hold the market at the 6,100 area but should eventually test the previous low of 5,678. Once this is broken, it will be anybody’s guess. Hopefully, the market will be range-bound at these levels and consolidate.

The prospect of a falling market should not discourage you from investing. In fact, this is the best time to buy stocks. This is the season to bargain-hunt for stocks that offer good value. If your allocated investable fund for stocks is limited, you should rejoice when stock prices fall because you can buy more shares.

In a falling market like this, always prioritize the blue chips because they will be the first to get back fast when the market recovers. Normally, blue chips are reputable stocks that belong to the PSE index, but beware that not all stocks there are really blue chips. Choose your stocks carefully. Ideally, they must have reliable earnings track record, good management team and healthy financial cash flows.

If you want to play defensive, buy stocks that offer high dividend yields. As share prices fall, dividend yield rises. Not all listed companies in the stock market can afford to pay dividends. Buy stocks that have good dividend pay-out history. You may want to target dividend yield by buying stocks at a particular price range.

A good example here is Meralco. This stock pays cash dividends at least twice a year. In 2011, it paid total cash dividends of P7.80 a share. Last year, it paid slightly higher cash dividends of P8.10 a share. This year, it already paid cash dividends of P6.10 for the first half alone and is expected to pay another one before the end of the year.

Let’s say Meralco will pay the same cash dividends as last year at P8.10, although it is highly possible that it will pay higher dividends given its expected 22 percent earnings growth this year, the dividend yield of the stock at current price is about 2.5 percent per annum. This yield is much better than putting your money in the bank or SDA that earns minimal return of less than 1.5 percent a year.

When the market falls further, this stock may probably fall below P300 soon. Let’s say you pick this up at its recent low of P288, you would get a dividend yield of 2.8 percent, which is not bad at all as a guaranteed cash flow in this low interest rate environment, not to mention that the stock will appreciate eventually given its cheap valuation.

Other stocks that you can watch out for that offer potential high dividends are Aboitiz Equity Ventures (3.2 percent), Aboitiz Power (5.2 percent), Globe Telecom (4.4 percent) and PLDT (4.3 percent). These dividend yields are based on current share prices and can potentially go higher if stock prices fall.

There are other stocks that can be good candidates for investment, but make sure that they have at least three years of dividend payment record. Spend time to research the company you want to buy. What is the dividend policy of the company? How often does the company distribute cash dividends in a year? Have they increased cash dividends over the years? How stable is the company’s earnings to support annual cash dividends?

This may be a good time for you to build your stock portfolio. Start to build your core holdings with blue chips that have high dividend yields. Accumulate stocks at targeted price range. Use a chart to guide you at the prices you can buy the stock. Celebrate when the stock prices fall. The lower the share price, the better opportunity for you.

(Henry Ong is a registered financial planner of RFP Philippines. To learn more about financial planning and how to become RFP, attend their FREE personal finance talk on July 18, 7 p.m. at PSE Ortigas. Register at [email protected] or text 09173464126 name<space>e-mail<space>RFP Info Session)