5 stocks to buy amid the fear
A handful of stocks are ripe for the picking in the current market swoon.
The stock market got off to a rough start this week. Not only has the broad market swoon knocked the life out of most tickers, but several companies got hit on lackluster earnings reports.
My biggest concern: I am waiting for a couple of paychecks to clear. In fact, until they do, it would not bother me if the market continued to correct, drop, tank or even crash.
I fully understand that the prospects of these things scare many people. If you need your money soon and you're all-in, I understand your fear. When the day comes that I am two to five years out from needing cash from my nest egg, I will have tucked a more than sufficient portion of it under my proverbial mattress.
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Short-term sentiments aside, as a long-term investor, I am buying the following stocks on weakness: Electronic Arts (EA), Activision Blizzard (ATVI) and Zynga (ZNGA). That's right. I like all three stocks. If a space exists where multiple companies cannot only co-exist but thrive, the gaming sector is it.
Investors have bruised and battered each of these stocks. As of Tuesday's close, EA is down 44.6% from its 52-week high. ATVI is off 13.9%. And ZNGA took a 50.2% haircut.
Hold on tight, but if I were to create a basket between these three stocks, I would allocate 50% in ZNGA and 25% each in EA and ATVI. Yes, overweight ZNGA. Before you start talking about "bubbles," "irrational exuberance" and "dot-com booms and busts," let me explain myself.
First and foremost, I am a long-term investor. When I buy a stock, I do so with a time horizon measured in several years, not days, weeks or even months. And I buy future potential.
Zynga has the visionary in its CEO Marc Pincus. As I started to explain Monday, I invest in visionaries like Jeff Bezos, Mark Zuckerberg and Pincus. These guys started companies, created spaces, changed the world and continue to own the role of trailblazing pioneer. I will bet on an entrepreneur any day of the week over an MBA. (And I know Pincus has an MBA, but he's as much of an MBA as I am urban planner or heart surgeon).
That's why I go overweight Zynga. I want more of my money on the guy who dictates change to the other guys. While it's tough to hammer them too hard for it, both EA and Activision came way late to the digital party.
Neither company saw the future. Or, at the very least, they failed to act on it. Now, they're playing catch up. On the bright side, both have strong enough balance sheets to subsist while they regroup. Activision has no debt and about $3.5 billion in cash. EA sports only $534 million in debt and has nearly $2 billion in its savings account. And, on the even brighter side, their digital businesses are starting to emerge hard and fast.
At Activision, digital made up 34% of sales in 2011. Revenue in that segment popped 14% between 2010 and 2011, from $1.44 billion to $1.64 billion. At EA, digital growth has been even more robust, jumping 47% year-over-year (FY 2011 to FY 2012) from $833 million to $1.23 billion.
In all three cases, I basically blow off any near-term stumbles -- translation: I buy on weakness -- as long as the long-term narratives remain intact. For instance, Activision reports Wednesday night after the bell. If the company stumbles, I seize the long-term opportunity.
I only want to be long a handful of retailers. Generally, I will only consider apparel companies that operate from an Apple (AAPL)-like position of strength. They need to score high on at least one of the following three counts:
- A high-quality, exclusive brand not available anywhere else.
- An affluent, very specific target customer willing to pay a premium for quality and social status.
- The ability to control limited inventory by not discounting.
I outlined how LULU scores on all three counts in previous articles on TheStreet. I almost blew my afternoon martini through my nose when I read what a contributor to Seeking Alpha had to say about how LULU CEO Kristine Day operates her Canadian juggernaut:
The company has a curious business plan: It runs out of things on purpose (an attempt to boost demand by creating scarcity), it doesn't generally discount its products, it doesn't open new stores very often, and it doesn't electronically track customer purchases.
That was not an earthquake you just felt. It's a Steve Jobs' Bozo explosion bubbling to the surface.
I see LULU getting to the point where Ralph is now in about five-to-10 years.
LULU's revenue jumped nearly 41% between fiscal year 2011 and FY 2010, from $712 million to a cool $1 billion. Ralph, on the other hand, makes more than LULU makes in a year in just one quarter. In the third quarter of FY 2012, Ralph reported revenue of $1.81 billion vs. $1.55 billion in the same period of FY 2011. You do not necessarily expect to see 16.7% revenue growth, year-over-year, from an old heritage company like Ralph Lauren, but there it is.
I'm a fan of buying the leaders in a space alongside their indirect offspring. LULU amounts to the illegitimate love child Ralph Lauren never knew he fathered. By the same token, LULU follows in her father's footsteps none the wiser.
The market crushed both stocks on Tuesday. RL was down 3.1%, closing at $163.38. The stock dove as low as $154.25 intraday. LULU shed 3.0% to $74.93, but bottomed at $70.50 intraday. Heck, if you got in at or near Tuesday's intraday lows, you've more than outperformed the guy sitting next to you.
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