In September 2008, I wrote that it was not too late to sell stocks. With the market in the middle of a sell-off, this article went against the grain of popular opinion. I was proud of the result. The S&P 500 ultimately lost 39 percent between September 2008 and March 9, 2009, when the market hit its low.
I bring this to your attention as we attempt to deal with the current market environment. Should investors sell? Should investors buy? Should investors buy gold? These are legitimate questions, to which many are desperately seeking the answers.
This market is distinctly different from 2008—and in a positive way. This time around, I would stick to your guns and resist the urge to panic-sell. Back in 2008, we were in the middle of a bubble market that was deflating.
Asset prices—mainly home values but also bank balance sheets—were not what they seemed. Trillions of dollars in derivative securities value were lost, and we were at the end of a business expansion with a yield curve that had become inverted.
Today, balance sheets are in much better shape, and the yield curve is steep—but it's not inverted. We are in the middle of a recovery that has been fairly anemic and is likely to continue to be so. Most important, stock values before this recent selloff were not excessive. Prices were fair relative to expected earnings growth.
There is nothing certain about the future, yet those selling stocks sure seem convinced they're doing the right thing. I'm not naive enough to wait for a recession to bite me before acknowledging its presence, but I do think there needs to be a bit more proof that a recession is imminent.
It’s a good time to buy stocks at these depressed levels. Here are five names you can be confident in in this weak market.
Apple: As of Monday, Apple had dropped by 12.5 percent since hitting $403 per share on July 25. Does that make any sense for a company that is crushing Wall Street estimates quarter after quarter? Who would you rather believe: Wall Street speculators and fear mongers or a company that during the debate on the debt ceiling was noted for having more cash on hand than the U.S. Treasury?
Current prices offer investors a lower entry point on the heels of a stellar operating quarter. In the second quarter, Apple beat the average Wall Street estimate by a whopping $1.96 per share. The company is on track to make $27.41 per share for the fiscal year ending Sept. 30. For 2012, Wall Street has Apple earnings pegged at $32.22 per share. Using yesterday's closing price, investors can acquire that 17.5-percent growth for about 13 times current year earnings.
Google: Let's make a bold assumption that the market has it all correct and that the economy is indeed heading for a recession. Will slower economic activity negatively impact a company such as Google? All signs point to Google doing well no matter what the economy is doing. If anything, you could make the case that search use and advertising will increase during a weak economy.
Google is a proven productivity enhancer. That means that businesses that use its services get more bang for the buck. If things are tight, Google might see usage increase given that other growth opportunities drop by the wayside in a struggling economy. Selling in Google today, then, is speculative and not really based in reality.
Shares of Google closed at $607.22 on July 27. As of Monday's close shares were down 10 percent, and they were recently down about 7.7 percent since July 27. In my opinion, the selling is indiscriminate considering it was only a few weeks ago that the company trounced earnings estimates for the second quarter.
Analysts expect Google to make $35.50 per share in the current year, with that number growing by 18 percent to $41.94 in 2012. Investors can buy Google today for about 16 times earnings. I would buy this stock comfortably.
ConocoPhillips: Oil prices followed the lead of the market and sold off just as dramatically. The idea is that a slowing global economy will somehow change the current supply-demand dynamic. Crude moves lower are likely to be temporary. Whatever the problems of the world, one thing is certain: Crude supplies are falling.
From a peak on July 21 at $75.10 to the close on Monday, shares of ConocoPhillips had slipped by 18 percent; they're down about 14 percent from July 21 to today. While some selling may be justified, a move of that magnitude makes little sense considering the company is printing money.
In the second quarter, Conoco made a profit of $2.41 per share soundly beating the average Wall Street estimate of $2.19 per share. With shares trading for about 8 times current-year estimates and paying a dividend of about 4 percent, investors can safely buy shares of Conoco today.
Wal-Mart: Wal-Mart is as much a part of the problem with the global economy as it is the solution. Its supply network of cheap goods produced in China helped that country build up reserves from a trade surplus that was then deployed to buy cheap U.S. debt. One wonders how much borrowing would have transpired over the last decade without that key buyer in the Treasury market.
Now with deficits, debts and downgrades staring us in the face, lower prices will be all the more important to consumers. A beneficiary of such constraints will be Wal-Mart and its low price model. With most of its sales in key nondiscretionary items including grocery, Wal-Mart should be able to withstand a recession with little problem.
Shares of Wal-Mart were down 10 percent from its July 22 close of $54.52 as of Monday, making the stock one of the better performers in the market meltdown. With shares trading at 11 times estimates for the current fiscal year ending Jan. 31, 2012, investors can confidently buy Wal-Mart today.
CSX: Lately I see retail centers full of shoppers and coffee shops filled with loyal customers. Trucks are shipping goods and trains are transporting just as they did a month ago.
On that point, a transportation company such as CSX is one that investors can confidently buy today. The double-dip recession theory tells you that less demand in the economy means fewer goods shipped. It's a nice little theory, but what about shipping coal? Is that likely to decline much in a double dip? I don't think so.
CSX is down 19 percent from July 25 to Monday's close and recently down about 12 percent from that date. There are many negative things that need to happen in the future to justify that price that I just don't see happening.
I would view CSX as a defensive play more like a utility stock. The company pays a dividend of more than 2 percent, and shares trade for a modest 12 times earnings. For the moment, Wall Street is looking for profit growth well above that multiple.
CNBC Data Pages:
- Dow 30 Stocks—In Real Time
- Oil, Gold, Natural Gas Prices Now
- Where's the US Dollar Today?
- Track Treasury Prices Here
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