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10 (New) Picks for a Correction
04/23/2013 9:45 am EST
Much has changed in the two months since MoneyShow's Jim Jubak assembled a list of stocks to buy if the market were to fall. Some new names now appear on the list.
On February 25, I wrote a column naming 10 stocks to buy after a correction—just in case we were about to see one.
Turns out the weakness in February didn't turn into a correction. The S&P 500 fell from 1,531 on February 19 to 1,487 on February 25, but then rebounded to 1,593 by April 11. That 2.8% drop from the 19th to the 25th never reached the 10% decline to qualify as a correction.
But here we are again, in late April, with the US market looking weak enough that a correction is certainly not out of reason. Some economic and market conditions even make a correction now more likely than back in February.
Just like in February, I'm not predicting a correction—there are just too many moving parts right now to give me any confidence in a prediction here. I do think the odds of a more extended decline are now higher than they were in February.
I think raising some cash makes sense here as a way to reduce the volatility of your own portfolio—and to give you some money to put to work at lower prices—if we do get a correction. And I think it's a good idea to put together a list of stocks you'd like to buy if we do get a correction here.
Because so much has changed since February, I think it's important to revise my earlier list of potential buys. The stocks you would like to buy on a correction now are different from the stocks that I listed as potential buys on a correction in February.
Names to Keep
Just in case you haven't memorized that list, here are those ten picks, in four categories, in boldface text below. This is what I wrote then:
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 Castparts (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. In February, I put Yingli Green Energy (YGE) and Australian miner Whitehaven Coal (WHC.AU in Sydney) in this group.
In Two Camps
Before I go on to give you my revised list of ten picks for a correction, let me do a brief survey of what has and has not changed since late February. In the "has not changed" camp:
- This is still a financial market dominated by cash flows from global central banks, the low interest rates created by those policies, and the volatile sloshing of money from one national market to another as investors seek a momentary trading profit.
- The Eurozone is still in crisis and still in recession—maybe even a deeper recession. Greece, Portugal, Ireland, Italy, and Spain have been joined in the list of crisis spots by Cyprus and, soon I expect, France.
The economies of these countries will continue to deteriorate through the summer, with the accompanying decay in national debt-to-GDP ratios. That will require either extensions of debt targets set by current bailout plans or new rescue plans. But getting Eurozone action on anything will be difficult if not impossible before September elections in Germany.
- The US economy will probably continue to chug along, but not without periodic bouts of worry as one data sequence or another shows that US growth might be slowing.
In the "has changed" camp:
- Investors have switched from hope that Chinese GDP growth would accelerate from the 7.9% in the fourth quarter to a belief that growth will actually slow a bit below 8% for all of 2013.
- Commodities have gone from appreciating on the belief that a rising Chinese tide would lift all boats named copper, iron, and oil, to a worry that demand will not pick up enough to make up for scheduled increases in supply. Commodity after commodity is forecast to move into surplus in 2013.
- A plan from the Bank of Japan to pump $80 billion a month into the global money supply will not only weaken the yen, but will probably lead countries such as Thailand, Indonesia, and Brazil to slow their economies in an attempt to discourage inflows of hot money that could produce runaway inflation and a domestic bust in overvalued asset prices.
Emerging economies are still expected to lead developed economies on growth, but the projected growth for emerging economies is significantly lower for 2013.
How does this change my list of ten picks for a correction if we get one?
Westpac Banking is down just 1.7% since I sold on April 16, and Nestle is down just 0.4% since my February 6 sell—each has much further to go. Novartis is actually up 1.4% since my April 3 sell.
Cummins, down 10.4% from my February 11 sell, is the closest to re-buying territory, but considering the new worries about growth in China and the continued slowdown in Europe, I would now like to get the shares nearer to $101, a 15% drop from my selling price, than the current 10% drop to $107.66.
To prioritize these four stocks to keep this list down to ten, I would stick with my original two picks from February of Nestle and Cummins.
Meanwhile, Group 2—stocks I've been waiting to buy but have run up too far—stays the same in concept but gets some different membership.
The February group, with Cheniere Energy, Marathon Petroleum, and eBay, is too heavy on commodity stocks, given the current downtrend in that sector. Especially since I think that downward trend may persist, given China fears, even after the correction is over.
I would keep Cheniere in this group, since the company continues to make good progress toward becoming the first licensed exporter of liquefied natural gas from the United States. The current domestic glut in natural gas should last long enough for Cheniere to reap considerable first-mover profits.
A refiner such as Marathon Petroleum, located to take advantage of the boom in US oil production from the mid-continent shales of the Bakken and other formations, will do well eventually. But fears of falling global oil demand will hang over the stock. I think you can do better.
I added eBay to my portfolio on April 22, on a 9.3% drop accelerated by the company's lowered guidance in its first-quarter earnings report. To Cheniere Energy, then, I would add IBM (IBM), which looks like it has had one of its rare stumbles in the first quarter, and BlackRock (BLK), which has become the player to beat in the fast expanding ETF industry.
An Extra Pick
I'll leave Group 3—stocks that never seem to get cheap—essentially unchanged. I doubt I will get a shot at Middleby or Precision Castparts, but I can dream. And I would pick them up on a 10% drop like a shot.
I am going to switch out Pioneer Natural Resources, however, on the idea that oil prices will remain under pressure. I am going to leave this slot unfilled in Group 3 and move an extra pick to Group 4. (Precision Castparts is a member of my Jubak's Picks portfolio. Pioneer Natural Resources is a member of my Jubak Picks 50 long-term portfolio.)
Group 4 back in February was composed of stocks that would get hit harder than other stocks in any downturn. Right now, there is no need to speculate on what stocks qualify for Group 4. Commodity shares have been slaughtered and emerging-market stocks have been pummeled.
I think they could well have further to fall, but we also know from watching the performance of heavily punished sectors after the last few busts that the stocks that have suffered the worst punishment rack up the biggest gains, at least in the early stages of a recovery.
Look at the outperformance of financials after the turn in the global financial crisis. (Although for a caveat emptor, you do not need to look any further than the performance of these stocks in the crisis itself.)
My suggestion here is to look at a few speculative big bounce candidates that have been punished severely but that have internal stories to drive gains in a recovery. So for example, Thompson Creek Metals (TC), down 41% in 2013, will rebound with copper and gold prices—if they do rebound—and with the completion of the Mt. Milligan copper and gold mine.
Latam Airlines Group (LFL), down 16% in the last three months, will rebound with the Brazilian economy and with any rebound in emerging markets in general—but the airline will also get a boost from continued cost-cutting at its new Brazilian acquisition, TAM Airlines, and as falling oil prices product falling fuel costs for airlines.
Of course, the biggest play in this group is Apple (AAPL), down 21% in the last three months, which will get the benefit of a turn in the product cycle in mid-2013 or so. (Thompson Creek and Latam Airlines are members of my Jubak Picks 50 portfolio. Apple is a member of my Jubak's Picks portfolio.)
Mind you, I am not rooting for a correction. I would just like to be prepared if one comes along.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, I liquidated all my individual stock holdings and put the money into the fund. The fund did own positions in Apple, Cheniere Energy, eBay, Latam Airlines, Precision Castparts, Westpac Banking, and Whitehaven Coal 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 here.
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