10 Stocks for the Bad Old Summertime

05/11/2012 9:00 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

The road ahead promises a lot of ups and downs, something we’re starting to see already. But a list can help you recognize and snap up bargain stocks, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Buy on the dip? Sure.

But which dip and when and what stocks?

I think the next few months will be especially treacherous to navigate. Yes, especially, even compared with the falling market of the past 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 prices down even further. 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 ten specific stock ideas to fill out those three categories of stocks to buy on this dip (or the next one).

Greece Is the Word
Right now, stock prices are being driven by the Eurozone debt crisis—and particularly by the return of the Greek debt crisis to 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 US 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 US 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 determined 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 US economy is slowing after the May 4 disappointment on April job growth. There’s also fear that China’s economy is headed for a harder landing than expected.

A Positive Jolt
I think that by midsummer, there’s a good chance that both of those latter two fears will be shown to be less of a worry than they seem now.

For example, the JOLTS (Job Openings and Labor Turnover Survey) data released on Tuesday suggest 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 zero 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 track the number of job openings and the workers voluntarily leaving their jobs—pointed to a stronger job market than that reflected in April’s jobs numbers.

The consensus among economists right now is that both the US and Chinese economies will show stronger growth in the second half.

Doing the Drachma
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 abandon the euro as its currency. This will 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 Eurozone, 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 inspectors from the troika of 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.

To greet them, the Greek government was supposed to be putting further budget cuts in place, as well as designing its next budget and a long-term plan for an additional $15 billion in budget cuts for 2013 and 2014.

I’m sure you can see the little problem with that: There is no Greek government. And odds are that Greece is headed back to a new election in June. Even if that election results in a 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 on long-term debt, for example—are beyond the means of the country without the troika payment.

In August, then, the IMF and its European partners will decide whether or not to pull the plug on Greece. Unless, of course, a run on Greek banks takes place earlier than that, 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.

NEXT: Real Rallies on Unreal Solutions


Real Rallies on Unreal Solutions
That doesn’t mean we couldn’t get a rally somewhere in there, when Eurozone politicians put together one of their joint "solution events." These so far have shown the power to inspire momentary jolts 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.

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 buoy the market.

For a while. Until the endgame in Greece crushes confidence again.

The Long and Short of It
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 be relatively serious, if the European Central Bank does something big enough to allow investors to focus on improving conditions in the United States and China for a moment (if there are improving conditions to focus on).

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. 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 François Hollande as a guide. If that meeting produces promises—believable promises—of a growth compact, I think that could put a (temporary) end 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.

10 Names to Know
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 of $33.33.
  • 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. In my March 28 post on Schlumberger, I suggested a buying price of $64 to $65.)

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 P/E to growth ratio 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 Nestlé (NSRGY), which looks like it is going to test its 200-day moving average at $58.90. (Nestle is also on my watch list.)

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 from customers who put off orders in the Great Recession that has driven Cummins (CMI).

In this group, I’d also put Novo Nordisk (NVO), the dominant diabetes drug-maker, which is looking at an entry into the weight-loss drug market. (Novo Nordisk is on my watch list, and on April 30 I suggested a buy at $130.)

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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International 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 here.

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