What to Buy Now for the Stock Market May Have Found a Bottom

The stock market may be forming a bottom after selling off between September and early October. A buy signal might have fired when 10-year Treasury yields hit October 15 an intraday low of 1.86% -- a yield lower than the S&P 500’s dividend yield of 2.1%. In an ultra-low rate environment, the S&P offers more potential for long-term capital appreciation on addition to a competitive income distribution. It's no wonder that stocks rebounded sharply from their intraday lows since that day. The benchmark 10-Year Treasury yield has managed to rebound back above 2%. 

The stock market is more attractive than risk-free investments because bond yields are hardly outrunning inflation, which stands at 1.7%, as of August. Around the world, risk-free yields are even lower.  There are hardly any other investment choices outside the U.S. stock market given the uncertainties abroad.

Investors may want to consider buying stocks with higher real yields relative to bonds to preserve their purchasing power. Historically, interest rates have tracked the nominal U.S. gross domestic product growth rate.  Thus, bond yields are projected to stay ultra low for the foreseeable future unless we see an unexpected jump in inflation or GDP.

Historically, dividend payers have provided higher returns than non-dividend payers with less risk, according to Oppenheimer Funds. As a result of the September-October sell-off, General Electric Company (NYSE:GE)’s (GE) valuations are the most attractive they've been in two years. GE currently sports a dividend yield of 3.5%, which is higher than both the S&P 500 and its industry average. The multi-national conglomerate trades at a cheaper price-to-book ratio (1.9) and price-to-forward earnings ratio (14) compared to the market benchmark and its industry, according to Morningstar data.

GE's shares have underperformed the S&P 500 this year on fears about a weakening global economy. But it eclipsed third-quarter earnings expectations by cutting costs although revenue missed analysts' estimates. For full disclosure, I bought GE stock the week of October 13 for clients and myself at below 24.

GE’s software platform for the industrial internet, known as Predictivity Solutions, is anticipated to produce $1.3 billion in sales in 2014 and is seen growing to $4 billion to $5 billion by 2017, according Bank of America Merrill Lynch analysts. They forecast that GE’s software can sustain a 20% and up top-line growth rate through the end of the decade, adding 1-2 percentage points of corporate EPS increase per year, they stated in a client note Oct. 10.

Many other blue-chip dividend payers are also trading at bargain basement prices, although their dividends may not be as fat as GE’s. American International Group Inc (NYSE:AIG) is changing hands at less than book value with a P/E ratio of 11 -- less than its peers’ P/E of 14 and S&P 500’s P/E of 18. Bank of America Corporation (NYSE:BAC)  and Citigroup Inc (NYSE:C)are also trading at a discount to book value.

One of Warren Buffett’s most notable quotes is investors “should to be fearful when others are greedy and be greedy only when others are fearful.” I started to feel greedy Oct. 15, when the VIX -- the so-called fear gauge -- blasted 15 percent in just one day to its highest level since December 2012. That suggested the crowd was trembling with fear. Investor sentiment, as tracked by CNN's Fear & Greed Index, has shown "extreme fear" in the stock market for a month, which means contrarian investors should be brave and nibble at shares.