10/25/2012 10:15 PM ET|
16 stocks for the rest of 2012
To make sense of the uncertainties ahead, balance buying opportunities from the US market pullback with resurgent growth in China.
It's time for some heavy lifting for the last months of 2012. That will mean using a barbell strategy, in which you load a portfolio with stocks clustered at opposite ends (supposedly) of a spectrum.
For the remainder of 2012, I'm suggesting a barbell strategy heavy on U.S. domestic stocks that match up with my call for slow but better-than-expected economic growth in the United States and -- at the other end of the barbell -- overseas stocks that match up well with my call for a slow but clearly discernible re-acceleration of China's economy.
At each end of that barbell, though, I'm going to add a little extra weight in the form of a few U.S. technology stocks and a few global commodity stocks.
Why is this superweighted barbell strategy attractive? Well, let's take a look at where we are in the market.
On one end, the US pullback
Right now, the U.S. market is in the midst of a mild but worrying retreat amounting to 3.9% (so far) from the 1,466 high on the Standard & Poor's 500 Index ($INX) for 2012 on Sept. 14 to the 1,408 close on Oct. 24. The retreat is more worrying than the magnitude of that drop indicates, because much of the damage has been done on earnings for the third quarter that missed Wall Street estimates and on lowered guidance for earnings and revenue for the fourth quarter or into 2013.
Caterpillar (CAT), which reported Monday, is typical: The company lowered guidance for the full year of 2012, with projected revenue falling to $66 billion from $68 billion, and also talked about weakness in its overseas markets, particularly China, in the first half of 2013.
Or take a look at McDonald's (MCD), which reported Oct. 19. The company missed Wall Street earnings estimates by 4 cents a share -- due, in part, to an 8-cents-per-share hit to results from a strong U.S. dollar. Operating income was down 4% -- but flat in constant currency terms -- and global revenue was flat but up 4% in constant currency. The company said it expects the near-term environment to remain challenging and, as an indication, talked about October same-store sales trending negative. Watching the reaction of Wall Street analysts to that comment on the conference call brought to mind a nature documentary of wolves taking down a caribou.
These are exactly the kind of comments that rattle investors when a market is near a top -- even though they don't much matter after a correction. When stocks are coming off a top like that of Sept. 14 -- when the entire market seems expensive -- misses and lowered guidance for the quarter take on an importance that has more to do with the worries that come with a top than with the erosion of fundamental stories.
Face it: Investors get nervous when stocks move back up to the top of their ranges or toward important highs. It's why indexes frequently take more than one run at a high before breaking through to new territory.
In a pullback, bargains emerge
If we do get a correction -- say, if the S&P 500 drops back to its 200-day moving average at 1,376, roughly 40 points lower than the Oct. 24 close -- and investors start hearing Wall Street analysts say, "Stocks are now oversold," results like those that McDonald's delivered are going to look very different.
Instead of worrying that sluggish growth in the United States will make it hard for the company to beat last year's good same-store sales growth, investors will notice that they can buy the other McDonald's story, the slightly more long-term story, at $85 or so -- about 10% cheaper -- than the $94.09 the stock sold for on Oct. 16.
That other story was front and center in the company's conference call, but nobody seemed to be paying attention. McDonald's continued to gain share in China and in the U.S. domestic market, the company said. Because it has deeper pockets than just about any of its quick-service-restaurant peers (we don't call it fast food anymore, my dear), the company refreshes its restaurants at a faster pace than the competition does -- and a refresh is good for a 6% to 7% lift in sales at a restaurant, the company added.
Now if you wish you'd sold McDonald's, down 7.2% from its October high as of the close on Oct. 24, with the idea of rebuying it at a lower price, I can't say I blame you. But I wouldn't worry too much. The long-term fundamental story at McDonald's is intact, and at the end of this correction, you can bet that Wall Street will be telling folks to buy this bargain. (McDonald's is a member of my Jubak's Picks portfolio.)
Of course, you might like to do better than follow McDonald's shares down to $85 and then back up to $94 in the short term -- even though the stock is paying a 3.53% dividend.
For that, I think you need to look at the first end of my barbell: stocks for a slow-growing but better-than-expected U.S. economy.
Buy US stocks 'experts' are wrong about
What you're looking for here are individual stocks where the pessimists -- be they CEOs, economists or Wall Street analysts -- are wrong about growth prospects for the U.S. economy or for some part of it.
When a company does demonstrate that the consensus on growth is wrong, the market jumps in surprise.
That's exactly what happened with Lumber Liquidators (LL), one of the stocks I named Oct. 15 in my "slow-growth portfolio." On Oct. 24, the company beat third-quarter Wall Street earnings projections by 12 cents a share (reporting 46 cents instead of 34 cents) and reported an 18.8% increase in revenue to $204 million versus the $189 million consensus. Lumber Liquidators followed that up by raising guidance for 2012 to earnings of $1.53 to $1.59 a share, from a prior $1.30 to $1.42, and revenue of $791 million to $799 million, from prior guidance of $750 million to $775 million.
The numbers further down the quarterly report weren't too shabby, either. Comparable-store sales, for example, increased by 12% in the quarter, driven by an 11.7% increase in store traffic. And while the company guided Wall Street to expect comparable-store sales in the high single digits in the fourth quarter, management noted that the sweet spot of comparable sales growth -- 22% -- at its stores came at stores open for 13 to 36 months. The company has been growing its store count in recent years -- adding roughly 25 this year, for example -- so Lumber Liquidators has a good pipeline of maturing stores to feed into its numbers.
To my regret, I didn't add Lumber Liquidators to my Jubak's Picks portfolio back on Oct. 15, so the portfolio missed out on Wednesday's pop to an all-time high, closing at $55.81. You're obviously taking on more risk buying near that high than 10% or 15% lower, but I think once a stock has taken out its previous high, shares often have solid momentum to go higher.
If you like that logic, I'd also recommend PulteGroup (PHM) from my "slow-growth portfolio" list.
If you like even your slow-growth surprises better after a pullback. I'd recommend Costco (COST), which I added to Jubak's Picks on Wednesday, and Dollar General (DG), which I'm adding now. The stocks were down 6.7% and 10.8%, respectively, from their September highs as of Wednesday's close.
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My Scots-Irish Grandfather was fond of saying that the best way to double your money is to fold it once and stick it in your pocket. He's never been far wrong.
Right now, the U.S. market is in the midst of a mild but worrying retreat amounting to 3.9% (so far)
worrying??? hey captain, I'm worried about that iceberg........
its all KOOLADE!!
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