4/22/2013 5:15 PM ET|
10 picks for a correction, revised
Much has changed in the 2 months since Jubak assembled a list of stocks to buy on a market correction. Some new names now appear on the list.
On Feb. 25, I wrote a column naming 10 stocks to buy after a sell-off -- just in case we were about to see one.
Turns out the weakness in February didn't turn into a correction. The Standard & Poor's 500 Index ($INX) fell from 1,531 on Feb. 19 to 1,487 on Feb. 25, but then rebounded to 1,593 by April 11. That 2.8% drop never reached the 10% decline to qualify as a correction.
But here we are again, in late April, with the U.S. market looking weak enough so that a correction is certainly not unreasonable.
Some economic and market conditions 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. 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.
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.
And 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 I listed as potential buys in February.
Names to keep
Just in case you didn't memorize that list, here are those 10 picks, in four categories, in boldface text below.
This is what I wrote then:
Stocks that I sold and I'd like to rebuy after a drop of 10% or so. In this group I'd put recent sell Cummins (CMI) -- down 5.7% from my sell as of the close on Feb. 22 -- and Nestlé (NSRGY) -- 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 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 (WHITF), traded as WHC.AU in Sydney, in this group.
In 2 camps
Before I go on to give you my revised list of 10 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 target 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 U.S. economy will -- probably -- continue to chug along but not without periodic bouts of worry as one data sequence or another shows U.S. growth might be slowing.
In the has-changed camp:
- Investors have switched from hope that growth of the Chinese gross domestic product would accelerate from the 7.9% in the fourth quarter to a belief that growth will actually slow to 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 also 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 10 picks for a correction if we get one?
Westpac Banking is down just 1.7% since I sold on April 16, and Nestlé is down just 0.4% since my Feb. 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 Feb. 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 buy the shares nearer $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 10, I would stick with my original two picks from February of Nestlé and Cummins.
Group 2 -- stocks I've been waiting to buy but have run up too far -- stays the same in concept but gets some different members. 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 U.S. 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 Jubak's Picks 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 as if 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.
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I think the market has gotten a little ahead of itself in the short term. We are at a tail end of a business cycle (increased hiring, large cap defensive stocks in favor and other typically lagging indicators). We have some headwinds in the short term (Europe, China, etc.). I think we will come to a moment where the question will be "Is that all?". This could be the catalyst for a correction.
Give it a couple of more years and I think the US will be on a new growth path.
The stock market picks are easy for me.
April 2008,. when I realized we wre going to elect a quasi socialist, either Clinton or Obama, I cashed everyhting out and bought gold.
There it stays until the inept lying quasi socialist in the white house is an esoteric, historical footnote/.
PYSCHOPATHS DESTROYED AMERICA:
If a college degree or two or six were the genuine ticket to success, then why do we go to high school? Name another creature on Earth that trashes the aggressor who goes forth and makes his way, while giving the keys to the kingdom to the last one who got drunk, naked, was consumed by commercially controlled sports, gambled and had no ethics? There are NONE. In fact, if there were, those kingdoms would be long gone... like ours is about to be. You need a degree to collect garbage today and those in administration, finance, law, politics and management, CLEARLY are incompetent. We would have an economy if they were not controlling and manipulating America through alumni collusion. Yesterday... we saw the Dow drop as it should- right from the opening bell... and then we saw colluders borrow a ridiculous sum (maybe $100 billion our great great great great great grandkids have to repay) just to buy back the sold shares of the Dow. That's buying the stock of DEAD business platforms stonewalling America with hiring blockades, imported goods and use of technology for counter-productive terror-like activities. If Man began as Accountants Bankers Administrators and Politicians... "Man" would have never completed one lifetime. He would have been tender bony meat for real species on Earth. Can you imagine ANY endeavor with just those in charge at large and no workforce? THAT would define all publicly traded companies in America today. GET OUT OF THE MARKETS, FOLKS. Let these pathetic beasts die so we can all live... AGAIN.
I'm not a trader, but I generally agree with the advice given in this article. However, my strategy is slightly different. Rather than raising contingency cash and focusing in on specific stocks, I keep a highly diversified group of managed portfolios with varying allocations and let the pro's manage the daily buying and selling of individual stocks / assets.
When I see an environment like we have now, with growing odds of a correction in the works, I simply shift funds away from the more aggressive portfolios and into a more conservative one (less equities and more fixed income types of assets.) That gives me the benefit of participating in the current bull market, but also gives me a way to benefit in the event of a correction.
For now I watch the markets with a bit of indifference, but generally hope for a correction, which is, frankly, the more profitable of the two outcomes for me.
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