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10 more good stocks for a bad market–and some thoughts on timing

posted on August 10, 2012 at 8:30 am
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My daughter at 11 eats only one flavor of ice cream. She knows chocolate is the best flavor in the world at all times and under all circumstances, so why try anything else?

Me? I’ll go with chocolate fudge brownie one day, mocha chip another. Sometimes mint chip. If I’m at Grom, the closest you can come to Italian gelato in my neighborhood, it’s bacio or stracciatella. And I’m always ready to sign up for a special French vanilla.

I’ve got a similarly eclectic taste when it comes to looking for a good stock—different flavors appeal to me in different markets. In my Tuesday August 7 post http://jubakpicks.com/2012/08/07/buy-good-stocks-in-a-bad-market-is-a-great-strategy-but-what-does-it-mean/ I laid out the reasons behind a good stocks in a bad market strategy and started to sketch in some of the different flavors of good stocks.

I wound up with five flavors: dividend-paying good stocks, good stocks for trading either in swing trades or sector and seasonal trades, stocks so good they go up even when the market goes down, hammered favorites for a rebound, and finally traditionally defined good stocks. I said that I thought it was still too early for flavor five, traditionally defined good stocks, and that I’d talked enough recently about candidates for swing trades (flavor two), but that I would flesh out the other three flavors with some specific stock picks in a Friday post.

Well, it’s Friday and here’s that post. (By the way, this is starting to make me hungry. If this post ends in the middle, it’s because I needed an ice cream break.)

Dividend-paying good stocks. Why look for dividends in your good stocks? First, if a fundamentally sound stock pays a decent dividend, that yield will support the stock price in a market downturn. Second, if the price of U.S. Treasuries continues to rise and the yields on Treasuries continue to fall, then investors can expect the yields and prices on other income vehicles to follow the same trends. In my Tuesday post I mentioned two stocks, both in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ that fit this bill, Abbott Laboratories (ABT) and Bristol-Myers Squibb (BMY), paying 3.1% and 4.2%, respectively.

Let me suggest three more today.  I’m sticking with U.S. stocks because if the market swings back to a risk-off trade with traders selling anything that smacks of risk, I like to be in U.S. equities rather in emerging or overseas markets. My picks would be:

General Electric (GE.) Protection comes from a 3.2% dividend and the upside is a result of the resumption of dividends from GE Capital to the parent. In the second quarter GE Capital paid $3 billion in dividends to General Electric. That helped finance the purchase of $900 million in the company’s stock by General Electric and the company has said that it plans to purchase an additional $3.5 billion to $4 billion in shares by the end of 2012. Wall Street projects earnings growth of 20% in 2012. (General Electric is a member of my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ .)

DuPont (DD.) Protection comes from a 3.4% dividend and the upside is a result of the company’s continued transformation from a commodity chemical company with relatively low margins to a growth company built around agriculture (24% of sales), nutrition and health (6.4% of sales in 2011 but more in 2012 with the full integration of the Danisco acquisition), performance chemicals (20.3% of sales), performance materials (17.8% of sales), and safety and protection (10.2% of sales.) The company is shopping its performance coatings business—one of the world’s largest producers of automotive paint and coatings—and is rumored to have three potential buyers. The unit shows EBITDA (earnings before interest, taxes, depreciation, and amortization) margins of just 6.5% in comparison to 15.3% at nutrition, and 19.2 at safety and protection.

McDonald’s (MCD.) Protection comes from a 3.2% dividend and the upside is a recovery from the over-reaction this week to the disappointing July same store sales. Global same store sales were flat with July 2011 with the U.S. showing a 0.1% drop, Europe down 0.6%, and the Asia-Pacific region down 1.5%. Sales growth in Latin America and Canada brought the company back to even. (McDonald’s is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

They don’t go down when the market does good stocks. A few stocks in this market fit the traditional buy good stocks in a bad market formula because they seem able to go up even when the market doesn’t—or are at least able to hold their ground when the market stumbles. In my Tuesday August 7 post I mentioned Apple (AAPL) and Precision Castparts (PCP), both in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ .

Let me suggest four more today.

Middleby (MIDD.) This is one frustrating stock—frustrating because it never gives me a chance to buy it on much of a dip. I’ve been able to pick up shares at $96 and $98 during the big May decline to the early June low, but Middleby’s shares have stayed between $95 and $105 during all the recent volatility. (Well, until yesterday when the stock gained 13.5% after a big quargerly earnings beat.) The company reported second quarter earnings after the close on August 8 of $1.67 a share, beating the Wall Street consensus by 23 cents a share. Revenue climbed by 23.3% year over year to $260 million against the $252 million consensus. Middleby just keeps building market share through organic growth and through acquisitions in the still very fragmented market for restaurant kitchen equipment. The company’s secret revenue weapon: The Great Recession has left a lot of restaurants with aging equipment since they have cut capital spending when growth slowed. They have a lot of catching up to do.

ASML Holding (ASML.) It may seem unusual to have a Dutch technology—not only are technology stocks supposed to be volatile but there’s that euro thing too–company on this list but ASML Holding is a rather unusual technology company. ASML recently received equity investments from its biggest customers Intel (INTC) and Taiwan Semiconductor Manufacturing (TSM) because chip makers need to push the frontier for packing even more computing power onto even smaller chips and ASML’s extreme ultra violet lithography machinery is, these customers feel, the best way to get there. Nothing like a 20% equity investment—with a synthetic buyback to prevent existing shareholders from suffering dilution—to demonstrate the future of your products.

EMC (EMC.) EMC was doing fine growing earnings even in a slow global economy—year over year earnings growth for the last five quarters was 29%, 26%, 37%, 22% and 15%–but this is a company that’s determined to find new growth. The company has announced a partnership with Lenovo, the Chinese company that is the world’s second largest maker of PCs. Lenovo will resell EMC’s networked storage solutions, starting with Lenovo’s customers in China. The deal will help Lenovo grow its server business (more trouble for Dell (DELL) and Hewlett-Packard (HPQ)) and it will give EMC a good chance of expanding its sales in Asia—the Asia-Pacific region accounted for just 13% of EMC sales in 2011 and the company has only a 22% market share in the region versus 30% globally. And don’t forget that EMC owns 80% of VMware (VMW.)

IBM (IBM.) The old saw is “Nobody ever lost their job recommending the purchase of IBM equipment.” That resonates in the current economic climate where companies need to be sure that new equipment and software will run with legacy gear and that services can be outsourced from a company that understands existing systems and software. IBM has reinvented itself going from a predominately hardware company (hardware represented just 18% of sales in 2011) to a hardware/software company (software represented 25% of revenue in 2011) to a services-driven company (services are now more than 50% of sales.) The combination gives the company a significant advantage over hardware-based competitors (such as Hewlett-Packard) and over service providers such as Accenture (ACN.)

They bounce back quickly–and hard–from any drop good stocks. Stocks in this group combine solid fundamentals—they’re well run, dedicated to investing for the long-term, and have built an enviable market presence—with a strong base of faithful investors who believe that they’ll be rewarded if they buy on the dip. Some of these stocks—like Cummins (CMI), a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ , are what I’d call long-cycle cyclicals—they do indeed ride cycles of sales booms and busts but the cyclicals can run for five, six, seven, or more years. Cummins, I’d argue has been riding a cycle since late 2008 that still isn’t quite done. Other companies are riding longer trends more than cycles and any dip is a chance to catch a long-wave.

I suggested Cummins as a member of this group on August 7. Let me suggest three more stocks today.

Schlumberger (SLB.)  You want to own shares of this energy technology company because oil is getting harder to find and Schlumberger’s tools make it easier, faster, and often cheaper. The stock closed at $73.66 on August 10. You would have done quite well buying on the dip to $59.06 on September 30, 2011 or to $54.29 on August 27, 2010.

Ensco (ESV.) This deep-water driller doesn’t have the history of Schlumberger but it’s riding the same trend and shows an interestingly similar ability to bounce back from a trouncing. The stock closed at $42.21 on June 25, 2012 and at $55.62 on August 8.

Pioneer Natural Resources (PXD.) Every time shares of this oil producer have tumbled, they’ve picked themselves right up off the floor again. Look at any chart. Lows on October 3, 2011, December 19, 2011, and June 25, 2012 have each been followed by substantial rallies. I think that’s because to many investors this stock has become the poster child for the revival of oil production in the United States from unconventional shale geologies.

So how would I use the ten stocks and three groups that make up this list? It depends on the flavor of the market.

If I were looking for protection in a shaky market I’d go with the protection of good stocks in the dividend group. If I’m looking at a modest correction with good but not great sailing ahead I’d go with the never-sink stocks of my second group. And if the market has taken a licking and I’m looking for a horse to ride in the recovery, I’d go with the stocks in group three.

Right now, this looks like a shaky market and I’d be looking for the protection of the dividend group. If we get the correction or dip I expect in August-September I’d take a look at the stocks in groups two and three, depending on the degree and cause of the pullback.

In other words this isn’t a list of stocks to go out and buy all at once and right now. Deploy these good stocks gradually as a bad market demands over the next few months. I’ll be adding some, I’m sure, to Jubak’s Picks when the time is right.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple, Cummins, Ensco, McDonald’s, Precision Castparts, Pioneer Natural Resources, and Schlumberger as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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  • aj on 10 August 2012

    It would be nice if you post 5 Dividend Stock Domestic and 5 Dividend Stock internationally for a long term.
    You look near retirement age so your time horizon might be short.
    I hope you write on above 10 Dividend Stock whose time horizon is 20 years for IRA and 520 Club account.
    I still have 30 years to go for retirement and I have kids that have 18 years to go for collage.
    It would be nice to see somebody write on that. I am a long time reader on your site.

    Thank you.

  • aj on 10 August 2012

    Hi Jim,
    I know you once wrote on SPWR with 20 years time frame. But that was only one stock that also don’t pay dividend.

    Nice to see if you write similar article for dividend stocks.

    Thank you.

  • scottsws on 10 August 2012

    There is no such thing as buying a stock for 30 years. Too many things can go wrong even with consumer staples stocks such as Proctor and Gamble or Kraft. If you want a long term view of things, look at Jim’s 50 stocks for the long run. Read his book even though it is several years old. The local library surely has a copy. If you want to buy and forget, invest in amutual fund.

  • aj on 21 August 2012

    There are some stocks in Jim’s 50 best global companies are not worth the spot. I think he needs to update his list and remove at lest 10 companies from that list.

  • trigent on 4 September 2012

    i have shares in asml. twice in the last 6 mos i have been asked to vote on long lists of permissions to issue more stock (at least this i how i read it), in specific time frames, to unspecified customers that are investing in asml development projects. sounded like dilution to me. i voted against every one of them.

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