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Global meltdown: Can market survive the panic?

January 25, 2008 11:59 IST

It's a mess. It's bad. It's scary. And no, we haven't seen the last of it. You have probably wanted to pick up your phone and call your broker a million times over the past week. You just want to get out while you still have your shirt.

It's a natural reaction in a falling market: go to cash and wait for a turnaround.

And I'll agree with you a little bit. Now may not be the time for some of those riskier investments. But let's not throw the baby out with the bath water. I bet you're holding some great companies in your portfolio that are getting whacked by this whole downturn.

The phrase "Global Meltdown" is being thrown around all the newswires today after yesterday's massive global correction.

Look at some of these big names and their losses from early Tuesday, January 22, 2008.

  • Veolia Environnement (VE: NYSE) down 10.6 per cent
  • Toyota Motors (TM: NYSE) down 4.9 per cent
  • Chevron (CVX: NYSE) down 5.1 per cent
  • Hewlett Packard (HPQ: NYSE) down 4.8 per cent
  • Rio Tinto (RTP: NYSE) down 11.57 per cent

All of these companies are beating their industry's average earning per share. Do they really deserve to be clobbered like this? Would you really toss a company like Toyota out of your portfolio?

The answer is no.

These core companies are examples of stocks that are being thrown out with the bath water. All are well off their 52-week highs and in this weak market are continuing to drop.

52-Week High vs. Current Price

  • VE: $96.61 vs. $75.59: -21.76 per cent
  • TM: $138.00 vs. $95.86: -30.54 per cent
  • CVX: $95.50 vs. $79.90: -16.34 per cent
  • HPQ: $53.48 vs. $42.66: -20.23 per cent
  • RTP: $484.21 vs. $327.38: -32.39 per cent

That's not a sell signal. That's screaming discount. And there are dozens of these companies just waiting to pop once the rest of the world wakes up to realise that the U.S.'s financial crisis isn't crippling everything.

Now, the key to managing these market conditions is to realise what is happening. No matter how good these companies are, they are still getting whacked. And even if that is unfair from a fundamental standpoint, it is reality, folks.

So what does an investor do now, with the entire financial media complex panicking and calling for a worldwide meltdown?

Take a deep breath and stay calm. The last thing you want to do is something irrational and based on fear.

In some cases, this could be a great time to add to positions you already own to average down your entry price. For example, say you bought Chevron (CVX: NYSE) at the beginning of 2008. You would have paid somewhere around $94 a share. Current prices are about $80 a share. That's a loss of almost 15 per cent.

But if you pick up more shares at $80 a share, you average down your entry cost to $87 a share and your losses decrease to 8 per cent.

And, if CVX were to only rise to your original entry point, you wouldn't be merely breaking even, you'd have gained 8 per cent.

I know it's hard to put money in a market that it seems like nobody has any confidence in, but when good companies are being dragged down for no good reason other than lack of confidence in the markets as a whole, well, you want to stay invested.

All the global financial media outlets are saying, the drops we are seeing are the worst since September 11, so let us look back at what happened to good companies after that massive sell-off.

Between September 10, 2001 and March 2003, the Dow peeled off about 18.4 per cent. Of these five stocks we have been talking about, two performed better, two performed worse, and one was par for the course. Only one -- RTP, a gold and metals mining company-- stayed positive.

When the markets staged a comeback in March 2003, all five of these stocks outperformed the Dow Jones Industrial Average by the first week of 2004.

  • Dow up 35 per cent
  • VE up 46 per cent
  • TM up 46 per cent
  • CVX up 36 per cent
  • HPQ up 53 per cent
  • RTP up 41 per cent

Since the first week of 2004? VE is up 208.5 per cent; TM is up 49.7 per cent; CVX is up 117.9 per cent; HPQ is up 81.1 per cent; and RTP is up 232.3 per cent! Compare that to the Dow's climb at 15.7 per cent, and you have got one heck of a reason to stay in good companies during the downturn.

Look, I am not saying this global hiccup will not shakeout more of your profits. In fact, based on market fears and panic, I almost guarantee it will. But times like these require calm and confident portfolio management, not a cut-and-run strategy.

I really like these five companies. They are strong growth-oriented companies performing well against their competitors. (The exception may be HPQ, who could be doing better, particularly against companies like Cannon and IBM.)

And in the long run, you will be happy you stayed with good companies. But they are by no means the only good finds out there that'll stage a quick comeback once this market weakness dissipates.

Sara Nunally