Campbell Soup Company: High-Yield and Speculative Capital Gain Potential-Part 4

This is the fourth of what will be a long-running series highlighting dividend growth stocks that have technically entered bear market territory. Many investors define a bear market as when prices fall at least 20%. After coming out of the true bear market inspired by the Great Recession, stocks have generally been enjoying a very strong and long-lasting bull market. Additionally, as interest rates have been in a steady freefall, high-quality dividend growth stocks have become investor favorites. Consequently, high-quality dividend growth stocks have for the most part become overvalued as a result.

However, this has selectively been changing as several high-quality dividend growth stocks have technically dropped in value by 20% or more over the last year or two. In previous articles in this series I have made the comment that this has been happening when fundamentals have really not changed very much. That comment generated some pushback from readers. Therefore, it might be fitting that I clarify my remark and perhaps put it in its proper context.

First, the fundamentals of virtually every company are constantly changing. To me this is simply another way of saying that fundamentals are dynamic. Individual companies will have good and bad quarters and good and bad years. Frankly, I have never witnessed any company that produced consistently perfect fundamental results. Therefore, what my comment was suggesting is that a moderate growing company tends to stay a moderate grower and a fast grower tends to stay a fast grower. Moreover, consistent dividend payers tend to remain consistent dividend payers. However, that does not mean to say that every company will grow at precisely the same rate every quarter or every year, nor does it say that every dividend growth stock will increase their dividend by precisely the same rate either.

The point is that companies will generally maintain certain fundamental characteristics that will modestly vary from one year or one quarter to the next, but do not materially change. On the other hand, what can change dramatically over short periods of time is the valuation that the market is applying to any given stock. Consequently, valuations can become irrationally high or irrationally low when the stripes, so to speak, of the company have not materially changed. This is classically the Ben Graham metaphor: “in the short run the market is a voting machine, but in the long run it’s a weighing machine.”

Therefore, in as plain English as I can, this series of articles has thus far been discussing dividend growth stocks where valuations have gone from irrationally high to either fair value or lower. Furthermore, in each case the primary reason is because valuations had become too high and are now moving to more rational levels. With that said, it is not uncommon to see a piece of bad or troubling news or information acting as a catalyst. However, as I have stated before, extremely overvalued stocks are vulnerable to even a hint of bad or negative information or news. Nevertheless, it is my contention that the primary factor causing the price drops of the companies covered thus far was overvaluation. Moreover, with each video I produce I will be providing what I consider clear evidence to support that contention.