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May, 2004


The continuing decline in the stock market has brought more relatively safe stocks, with healthy dividends and good financial strength, within the range of our radar. Accordingly, I've added five more assets to the proposed portfolio of ten recommended in our last issue.

As a group, this new set of securities provides an annual dividend of 5.1%. Their average price to earnings ratio, at 12, is significantly below that of the overall market (approximately 19). All these assets have superior safety rankings and a debt to equity ratio of less than one. The companies' average dividend payout ratio is 65%. The assets' price to book value is in each case less than 2.0.

Ameron Corp.AEE6.2%13.81
CH Energy Grp.CHG4.8%16.58
Peoples EnergyPGL5.5%14.99
WGL Holdings, Inc.WGL4.8%13.96
Washington MutualWM4.4%5.67

(Values effective 5/12/04)

Even with such a sterling set of purchase candidates, though, a word of warning is appropriate. While I'm not a successful market timer, and doubt that any qualify in that role for long, I have never seen so few real bargains in the domestic stock market as is the case today. When this indication of equity overvaluation is coupled with the rather alarming current threats to market stability, from huge debts, to trade imbalances, excessive use of derivatives, an uncertain future value of the dollar, very low savings rates, challenging overseas military commitments, looming drains on the national budget from retiring baby-boomers, the potential for new and even greater terrorist assaults, the likelihood of a squeeze to many facets of our economy from rising interest rates, substantial commodity price inflation, and steadily rising health care costs, I think there is reason to question the sustainability of the bull market surge that began in October, 2002.

Thus, a wiser course than to commit extra cash at this point to the dwindling supply of compelling bargains might be to use such reserves for paying off debt or for investing in money market funds, keeping one's powder dry until, following a fresh, truly major sell-off, one may use it to pick off genuinely wonderful values available in an abundance of low-priced securities.

Yet, with Benjamin Graham before (The Intelligent Investor), I am not confident enough of such a safety-first approach being applicable now (for a new bubble of "irrational exuberance" could persist for several more years before the next big burst) to put all eggs in a money market basket. Perhaps, as he suggested, one should always keep about 50% invested in high quality securities like those in the table.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

Value Investing / Main Index / previous / next