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Buy on the dip in this market? Carefully, very carefully. But the bargains are out there
05/11/2012 8:30 am EST
But which dip and when and what stocks?
I think the next few months will be especially treacherous to navigate. Yes, especially, even in comparison to the falling market of the last week or so.
That’s because there will be more than enough volatility to dangle bargain prices in front of your eyes. And then to send some of those bargains down even further into the basement. And there will be enough upside volatility to present plenty of opportunities to buy into rallies just before they fade.
In other words the next few months will be a great time to buy high and sell low.
However, some of the bargains will be real. Investors will get a chance or two or three to buy stocks they’d like to hold for the long term at great prices—if they have the discipline to stick with them during the scariest days. There will be a few stocks that outperform no matter what the overall market does because they dance to their own tune—if you can hear it above the clatter of falling knives. And there will be stocks that have strong long-term trends at their backs, but where the trends have been obscured by the current market volatility.
Let me give you a quick sketch of what looks like a volatile summer and then 10 specific stock ideas to fill out those three categories of stocks to buy on this dip (or the next one.)
Right now stock prices are being driven by the euro debt crisis—and particularly by the re-emergence of the Greek debt crisis onto the front page of the financial section. This has ratcheted up fear and driven general selling of anything with any risk. Sell all stocks. Buy U.S. Treasuries even with the current negative yield after inflation. Buy dollars and sell euros (to an extent) and dump “risk” currencies such as the Australian dollar or the Brazilian real even though, in the medium run, it’s hard to make a fundamental case for the dollar. With the U.S. dollar on the rise, the prices of commodities priced in dollars (oil and copper, for example) are falling. Gold is also in decline as the dollar appreciates (and as the likelihood of inflation decreases and as the Federal Reserve and the European Central Bank seem convinced to remain on the sidelines.)
Of course, the Greek debt crisis and its sidekicks the Spanish and Italian debt crises aren’t the only volatility-inducing games in town. There’s also fear that the U.S. economy is slowing after the May 4 disappointment on April job growth. There’s fear that China’s economy is headed for a harder landing than expected. (And out of nowhere events like JPMorgan Chase (JPM) posting a $2 billion loss from its derivatives book last on May 10.)
I think that by mid-summer there’s a good chance that both of the fears about U.S. and Chinese growth will be shown to be less of a worry than they seem now.
For example, the JOLTS data released on May 8 suggests that the weak job growth in March and April is a result of a seasonal borrowing rather than a replay of the collapse of job growth in the summer of 2011. (In 2011 after strong growth in February through April, job growth collapsed to 54,000 in May and 18,000 in June on its way to 0 net jobs created in August.) The optimistic theory is that the drop to just 115,000 net jobs created in April after a only slightly stronger March at 154,000 is a result of warm weather in January and February moving job growth to those months from the spring months. The JOLTS data—which tracks the number of job openings and the number of workers voluntarily leaving their jobs—pointed to a stronger job market than that reflected in Friday’s jobs numbers.
The consensus among economists right now is that both the U.S. and Chinese economies will show stronger growth in the second half.
Of course, even if that turns out to be true, for it to have any positive effect on the financial markets we first have to get past the fear that Greece will default (again but this time officially) and leave the euro, and that this will then set off a chain reaction that engulfs Italy and Spain in its arc of destruction.
There are two problems with the current round of the Greek crisis. First, it is really, really serious. It is likely to force Greece out of the euro and it could cause the collapse of the Greek banking system. Second, in all probability it is going to drag on for quite a while. Two months is my estimate now.
May was supposed to be a very busy month in Athens with the troika inspectors from the International Monetary Fund, the European Central Bank, and the European Commission arriving to verify that the Greek government was living up to the conditions of the rescue package and with the Greek government putting further budget cuts in place and putting together its next budget and a long-term plan for another $15 billion in budget cuts for 2013-2014.
I’m sure you can see the little problem with that program: There is no Greek government. And the odds are extremely high that Greece is headed back to a new election in June. Even if that election results in an actual functioning government that government is extremely unlikely to be strong enough to meet the troika deadlines at the end of June.
Then it will up to the troika, which in this instance means mainly the IMF, to decide if it will release the next round of money for Greece scheduled for August. The likelihood, European analysts say, is that the Greek government can scrape together the money to keep the doors open in June and July. But that the demands of August—a repayment of $3.8 billion euros on long-term debt, for example—are beyond the means of the country without the troika payment.
In August, then, the International Monetary Fund and its European partners will decide whether to pull the plug or not on Greece.
Unless, of course, a run on Greek banks takes place earlier as any Greeks who can get their money out of a Greek bank rush to do so before a Greek government freezes accounts and forces a massive devaluation on a conversion of euros to new drachmas.
The panicked but totally justifiable withdrawal of deposits from Greek banks would lead to a collapse of the Greek banking system and the Greek government would be without funds to prevent such a collapse.
The short conclusion is that no one knows what will happen, the worst case scenarios are really scary, and the crisis will go on and on with the financial markets increasingly on edge.
But that doesn’t mean we couldn’t get a rally somewhere in there when EuroZone politicians put together one of their joint “solution events” that so far have shown the power to inspire a momentary jolt of confidence. This time around the “solution event” is likely to be a June conference and agreement to add a growth compact to the existing austerity compact. An addendum to the existing austerity package would meet German demands not to renegotiate the deal and yet give some hope to the citizens of Spain and Italy who can’t see any light at the end of the austerity tunnel right now. Such a package wouldn’t do Greece a lick of good, but it might convince financial markets that the EuroZone is building (again) a serious protective barrier around Italy and Spain. And I don’t rule out the possibility of some action from the European Central Bank once the situation has gotten so serious that the German faction at the bank is effectively isolated (again.) Another round of cheap money for banks or an actual interest rate cut or a revival of purchases of Italian and Spanish debt could each buoy the market.
For a while. Until the end game in Greece crushes confidence again.
You can see, then, why I think these next months will be so treacherous. We could have one long correction or two dips separated by a rally. The rally itself might actually be relatively serious if the European Central Bank did something big enough to let investors focus on improving conditions in the United States and China (if there are improving conditions in the United States and China to focus on) for a moment.
Instead of trying to figure out the timing of this macroeconomic puzzle my suggestion is to concentrate on the short-term price and the long-term fundamentals of individual stocks. When the price is right buy—if the long-term fundamentals still look solid—and don’t worry about whether you’re catching the best dip of the summer. I am not advocating that you forget about the background macroeconomic mess. This isn’t the time to go hog wild and load up a portfolio. I think you can pick up a bargain or two, but I wouldn’t advise drawing down all your cash. And I wouldn’t advise reaching for risk. This is the time to try to pick up conservative plays at good prices rather than to bet the farm.
When? I’d use the May 16 meeting between German Chancellor Angela Merkel and newly elected French President Francois Hollande as a guide. If that meeting produces promises of a growth compact—believable promises—I think that could put an end—temporarily—to the current dip. I would want to look around at that point to see if any of the stocks I’ve got in my potential bargain bin are selling at prices that are worth a bite.
I started out this post by dividing the world of potential bargains into three groups so let me finish with a few specific names in each.
The first group is composed of stocks I’d like to own for the long-term at the right price. Here I’d suggest McDonald’s (MCD), which fell through its 200-day moving average of $93.43 on May 9, Schlumberger (SLB), which after refusing to break below $70 finally cracked on May 9; Freeport McMoRan Copper & Gold (FCX), which is threatening its December low on the way to the November low at $33.33; and Baidu (BIDU), which looks headed to the $115 level that has repeatedly been a profitable entry point. (Baidu and Schlumberger are both on my watch list http://jubakpicks.com/ . In my March 28 post on Schlumberger I suggested a buying price of $64 to $65 http://jubakpicks.com/2012/03/28/close-but-not-there-yet-id-put-schlumberger-slb-on-your-watch-list-now/#symbol-SLB )
My second group is composed of stocks that I’d like to own for their company specific strength. The easiest way to explain what I mean by that is to say the name of one stock: Apple (AAPL). Apple has shown the ability to move up when just about everything else is moving down on its own revenue and earnings numbers. And the stock trades at a very modest price-to-earnings ratio of 12.1 times projected 2012 earnings per share. (Apple’s PE to growth ratio (PEG) is a low 0.58.) I’ve been waiting for $560 on the stock and I’m pretty sure I’m going to get my chance at that price or lower. Other stocks that I’d put in this group include IBM (IBM), which is giving ground very, very reluctantly, and Nestle (NSRGY) which looks like it is going to test its 200-day moving average at $58.90. (Nestle is also on my watch list http://jubakpicks.com/ )
My final group is composed of stocks where I can see strong emerging long-term positive trends that are, at the moment submerged by the market volatility. Middleby (MIDD) is an example: This maker of equipment for restaurants is looking at the same kind of wave of buying by customers that have put off orders in the Great Recession as has driven Cummins (CMI). In this group I’d also put Novo Nordisk (NVO), the dominant diabetes drug maker that is looking at an entry into the weight-loss drug market. (Novo Nordisk is on my watch list http://jubakpicks.com/ and on April 30 I suggested a buy at $130 http://jubakpicks.com/2012/04/30/novo-nordisk-disappoints-ever-so-little-and-takes-a-big-hit-id-wait-to-buy/#symbol-NVO .) My final stock in this group is Cheniere Energy (LNG), the leader in the race to export liquefied natural gas from the United States. Given the risk in this one, I’ve love to steal it at $11 or so, the 200-day moving average for the stock.
Take your time to think about these suggestions—or post some of your own in the comments. I think we’ve got plenty of time to do our research and make our picks.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple, Baidu, Cummins, Freeport McMoRan Copper & Gold, Nestle, Novo Nordisk, and Schlumberger as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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