Two Stocks That Will Ride the Next Rally

08/02/2010 1:00 pm EST

Focus: STOCKS

Richard Band

Editor, Profitable Investing

Richard Band, editor of Profitable Investing, says the market will move up in the months ahead, and he recommends two stocks he thinks will move with it.

If business activity keeps chugging along, as I believe it will, stock prices will bounce back.

However, the recovery process will likely take several months. Investor psychology has been wounded. Before marking up share prices significantly, Wall Street will need to hear a lot more good news than we’ve had lately.

Indeed, it wouldn’t surprise me at all if the blue chip stock indexes were to test their July 2nd lows (and perhaps undercut them by a couple of percentage points) some time in the next four to ten weeks. Meanwhile, we can expect plenty of hair-raising day-to-day volatility as investors sort through conflicting reports.

How do you manage through this rough patch? By doing a bit of tactical trading around the edges of your portfolio. The goal: raise a little more cash that we can deploy later on in other stocks with greater return potential.

I encourage you to prune some of your riskier stocks and mutual funds any time the Standard & Poor’s 500 index is quoted above 1090. Preferably, you’ll sell into strength, on days when the index is up 1% or more.

Once you’ve built up a decent cash reserve, you can hunt for blue-chip bargains. Take half your intended position now, and the other half when and if the market pulls back into the neighborhood of its July 2nd lows (The Dow Jones Industrial Average closed at 9,686.48 that day, while the S&P 500 closed at 1022.58—Editor.)

  • Accenture (NYSE: ACN). Essentially debt-free, with $4 billion of cash in the bank, this giant business consulting/IT outsourcing firm is well-placed to exploit long-term growth in the global economy.

Management recently upped its forecast of free cash flow for the fiscal year (ends August 31st) to between $2.3 billion and $2.5 billion. At the midpoint of that range, the company is generating $3.33 per share in free cash flow, for a true “investor’s yield” of more than 8% at today’s share price. Why settle for meager Treasury yields of 3%—and less—instead?

  • Oracle (Nasdaq: ORCL). The world leader in “enterprise” software (for running large organizations), ORCL delighted Wall Street with super-strong sales and earnings for the quarter ended May 31st.

Operating profit leaped 26%, helped by a surprising $400-million fillip from Oracle’s acquisition of Sun Microsystems. At a mere 12x estimated earnings for the year ahead, this exceptional business franchise is selling for a 30% discount to its valuation [of] just three years ago.

Buy Accenture at $42 or less (it closed Friday just below $40—Editor) and Oracle at $24 or less. (It closed just below that Friday—Editor.)

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