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One Great Security Stock

When investors perceive risk to be greatest (when the economic news is horrible) is when risk is actually lowest.

Boston Marathon Bombing

Americans Crave Security

One Great Security Stock ---

It’s been four weeks since the Boston Marathon bombings and life around here is pretty much back to normal.

So it’s time to put in my two cents.

First, the bombing was committed because a family fell apart, and a frustrated young man’s anger found an outlet in religion, and then in violence. Keeping families together is step one in preventing irrational acts.

Second, the 17 (!) Federal intelligence organizations listed below failed to identify the threat, despite repeated tips from Russian intelligence organizations.

Air Force Intelligence
Army Intelligence
Central Intelligence Agency
Coast Guard Intelligence
Defense Intelligence Agency
Department of Energy
Department of Homeland Security
Department of State
Department of the Treasury
Drug Enforcement Administration
Federal Bureau of Investigation
Marine Corps Intelligence
National Geospatial-Intelligence Agency
National Reconnaissance Office
National Security Agency
Navy Intelligence
Office of the Director of National Intelligence

And what intelligence they did have, they didn’t share with the local Boston police! That’s not at all reassuring; in fact it reinforces my conviction that the bigger our government gets, the less efficient it gets.

Third, the widespread acceptance of the massive mobilization of Boston area police and military forces in the days following the bombings revealed that American people crave security and that if they have to pay for it with a little inconvenience, like decreased mobility, they will. But I look at the economic cost of nearly shutting down the city for a full day with a “Shelter in Place” order (technically not a legal order but a recommendation) and I see millions of dollars of lost productivity, something few if any people are complaining about.

All three failures appear to me to be failures to act intelligently, instead of quickly and bluntly.

So how does this apply to investing?

Perhaps the greatest lesson we can take from it is that Americans currently crave security, and that any companies that promise to give it to them, from Internet security firms to insurance companies to gun-makers, deserve consideration in the hunt for profitable investments.

Speaking of security, a recent Gallup poll sheds some light on American attitudes in the realm of investing. In brief, “stock ownership among U.S. adults is at its lowest level in Gallup trends since 1998, essentially unchanged from a year ago. Just over half of Americans, 52%, now say they personally, or jointly with a spouse, own stock outright or as part of a mutual fund or self-directed retirement account.”

Gallup Chart

Now, there are many reasons behind this, not least of which is the weak employment environment. But my opinion is that in an environment where the anticipated gains from alternative investments like bonds are peanuts, investors are saying loud and clear that they have no appetite for risk.

It’s not so much that they don’t want stocks, but they don’t want the risk that comes with stocks. More specifically, they don’t want the risk that they perceive in stocks today.

Yet when investors perceive risk to be greatest (when the economic news is horrible) is when risk is actually lowest; that’s when stock prices are down, and that’s the best time to buy.

Contrarily, it’s when investors perceive risk to be lowest (when the economic news is good) that risk is actually highest. That’s when prices are high, and thus vulnerable to major corrections.

So, as a card-carrying contrarian, this news on stock ownership is music to my ears. I know the long bull market won’t end until participation is much higher. I know the long bull market won’t end until we see some real greed! And this is just one reason I’m continuing to recommend full participation in this bull market to my subscribers.

Get details here, including a look at my recommended stock that soared 41% last week (really!).

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One stock that caters to the security-conscious investor is Prudential (PRU), which was recently recommended by Roy Ward, editor of Cabot Benjamin Graham Value Investor.

Here’s what Roy wrote:

Prudential Financial (PRU), a financial services leader with approximately $1.06 trillion of assets under management as of December 31, 2012 has operations in the U.S., Asia, Europe and Latin America. Prudential offers investment management, group insurance and other financial services in the U.S., and life insurance overseas. Sales moved up sharply in 2012 as a result of acquisitions and two new major contracts for pension services. Acquisition costs, sluggish growth in the insurance business and higher claims in the disability business caused earnings per share to slip 5%.

“Prudential has exciting prospects for 2013. Acquisitions and new contracts will add considerable sales and earnings. Higher assets under management and increased pricing in the annuities business will add profits. The investment management business in the U.S. and insurance sales overseas will also provide a boost in 2013 of 21% to 7.88 for the 12 months ending 3/31/14. From 2002 through 2012, Prudential paid an annual dividend. Starting in 2013, the company will pay dividends quarterly in March, June, September and December. Prudential will likely hike the dividend from an annual rate of 1.60 in 2012 to 1.80 in 2013.

“On May 1, Prudential reported excellent first-quarter sales and earnings results. Sales climbed 13% and EPS jumped 42%, well ahead of my forecast. The company’s purchase of Hartford’s individual life insurance business in January and last year’s new contracts with General Motors and Verizon to manage part of their pension plan risk transactions provided a big boost to sales and earnings. Prudential will implement pension risk transfer strategies that reduce overall risk and provide additional protection for GM’s and Verizon’s benefit pension plans. The new risk business and acquisitions will push revenues and earnings considerably higher in 2013 and 2014. At 9.3 times latest earnings per share, and with a dividend yield of 2.9%, PRU shares are clearly undervalued.”

Prudential Financial Chart

Note: If you buy PRU right here and just hang on, it might work out fine. But then you’re not really using an investing system, and in my experience, that’s asking for trouble. In the case of the Cabot Benjamin Graham Value Investor system, two key components are the Maximum Buy Price and the Minimum Sell Price, which help you buy low and sell high. And I strongly urge you know about those before you jump into PRU.

For more, click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Editor of Cabot Stock of the Month

Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.