10 stocks for after a correction--if we get one

02/25/2013 10:33 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

(I normally wouldn’t post this until tomorrow morning, but given the day’s market moves and what might happen tomorrow, I’m posting it early just in case it’s useful under the circumstances.))

Are we in for a correction?

Could be. And if you think we’re headed for a replay of the late March-early June or the early September through mid November pullbacks of 2012, what should you be doing about it?

Raising a little cash seems a reasonable idea, of course. Although since we’re talking declines of 10% or less here (in my estimation,) I don’t think it makes sense to sell everything.

But you should also put some “correction preparation” time into putting together a list of what you’d most like to buy if we do indeed get a reasonable correction. In the current state of the financial markets not only are corrections relatively frequent events—but they don’t necessarily last very long. Remember we’re dealing with extraordinarily volatile markets here. The March 29 to June pullback, quickly turned into another rally, which itself took the Standard & Poor’s 500 up 14.8%, before it peaked on September 14.  If you’re dithering over what to buy on a sell off, these days, you could miss some of the best bargains.

That’s why for today’s post I’ve put together a list of 10 stocks to buy on a correction. (Technically a correction is a drop of 10% or more. There’s a good chance we’re looking a something less dramatic than that—say a 7% pullback.) I’ve compiled the list not because I believe a correction is guaranteed but because these days I think it’s smart to be prepared for volatility. I’ve grouped the stocks in this list into rough categories that correspond to how deep any pullback might be. Some are better buys in a shallow retreat. Others won’t get to be a bargain unless the U.S. market takes a sizeable dive. I think the news flow will have a significant say over whether we correct or not in the next month—and how big that correction might be—and calling the news is never easy.

I’m just trying to be prepared for which ever way the wind blows.

U.S. stocks have stalled—not in a big way but stalled nonetheless. The Standard & Poor’s 500 peaked at 1531 on February 19 and has moved slightly lower since, closing at 1516 on February 22.  And so have markets in Japan, China and Europe.

Maybe this is all just the normal pause after a huge rally that has taken the indexes near all-time highs in the United States.

But growth in the U.S. economy is threatened by the effects, first, of the January tax increase that was part of the deal to avoid the fiscal cliff and, second, of the sequester set to wipe billions out of government spending at all levels starting on March 1. EuroZone economies look to be either in recession—Spain—or headed that way—France. Japan and the United Kingdom seem about to embark on another experiment in quantitative easing that’s a tribute to the depth of problems in those economies rather than a vote of confidence in this monetary policy.

Could we have a correction here? Sure, although I certainly wouldn’t want to say one is guaranteed. Central banks continue to flood the markets with cash—and since economic growth isn’t vigorous in most of the developed world a lot of that cash is headed not into investments in new plant and equipment but into financial assets.

But in recent years it hasn’t been smart to overlook the possibility of a decent correction after any rally. Even in 2012, which was a good year for stocks with the S&P 500 delivering a total return of almost 16%, investors saw a drop of 6.2% from September 4 to a market bottom on November 13 and in the spring—which is, my calendar tells me, the season up next—the S&P 500 fell by 9% from March 29 to June 4.

With indexes in the U.S. near five-year or all-time highs, I’ve turned cautious lately. I’ve thought it made sense not to sell everything—since I don’t know that we’re guaranteed to see a correction soon—but to sell stocks that hit my target prices. So I sold Nestle (NSRGY) on February 6 and Cummins (CMI) on February 11. I might have sold more but I ended 2012 with a little more than 29% in cash. With that kind of cash position, I didn’t need to be too aggressive about raising more cash. (And if you think that kind of precision about the Jubak’s Picks http://jubakpicks.com/ cash position is a sign that I’ve just about finished my calculations for the portfolio’s performance through the end of the year, you’re absolutely right. I’m just double-checking some numbers now and I expect to post that performance report this week.)

The buying I’ve done under these circumstances has either been on the dip in individual stocks—Akamai Technology (AKAM)—or on strong trends outside the United States—Toyota Motor (TM) on a weak Japanese yen.

And now what? I’m watching and waiting and w-researching.

I’ve divided my watching and researching into four categories.

  • Stocks that I sold and I’d like to rebuy after a drop of 10% or so. In this group I’d put recent sells Cummins—down 5.7% from my sell as of the close on February 22—and Nestle—down 1.5%.

  • Stocks that I’ve been waiting to buy—but that have run up too far lately. In this group I’d put Cheniere Energy (LNG), Marathon Petroleum (MPC), and eBay (EBAY.) I’d look at this group, as well, if they dropped 10% or more.

  • Stocks that never seem to get cheap. You’re only likely to get these if the correction gets really serious—more like 15% than 10%. I don’t think we’ll get there but I don’t want to let a correction like that go to waste if we get one. In this group I’d put Middleby (MIDD), Precision Cast Parts (PCP), and Pioneer Natural Resources (PXD.)  And I intend to paste a Post-It to my forehead saying, “Don’t ever sell.”

  • Stocks that are more volatile than the general market and that are especially likely to get hit harder than the general market in a downturn. You can easily see the downside since some of the stocks in this group have already taken a beating in the last couple of weeks. But look back go the earlier stages of this rally to remind yourself of the upside potential. For example, Yingli Green Energy (YGE) was up 171% from November 23 through February 12. But the shares of this Chinese solar company then fell 14.6% in a matter of the less than two weeks from February 12 through the close on February 22. (Yingli Green Energy is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ ) You’ve probably got your favorites in this group, but may I suggest one that you may not have thought of, Australian coal miner Whitehaven Coal (WHC.AU in Sydney.) The shares climbed 30.6% from November 16 through January 23 before retreating 17.9% from January 23 to February 21. At the February 21 close in Sydney at A$2.94 the shares are almost back the A$2.74 of November 16.

Those are my ten. I think you can fill in those groups with picks of your own. Not time to do any buying, mind you. Just time to get prepared for what the market might throw us.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund owned shares of Cheniere Energy, eBay, Precision Cast Parts, and Whitehaven Coal as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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