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5 Large-Cap Stocks for a Choppy Market - 11849 views
MINNEAPOLIS (Stockpickr) -- When it comes to investing in the stock market today, the old rules of thumb of buy-and-hold investing no longer apply. In their place are new rules that require timing the market and being willing to trade.
Oh, I can hear the scoffing now. You can’t time the market, can you?
But I’m not talking about predicting every uptick. I prefer to think of the new paradigm as being similar to surfing. Waves come and go, and successful investors learn how to ride those waves. The rest are left to tread water -- or worse.
In the current environment, I’m finding it more and more difficult to find buying opportunities. Stocks are fairly expensive at the moment, and if you factor in macroeconomic data that is far from comforting, such as stubbornly high unemployment and a falling dollar, the picture is cloudy at best. The most likely direction for stocks from here is lower.
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I’m sorry, longs, but that is the way I see it. If you insist on owning stocks in such an environment, I would strongly urge you to stick to the big guns. These large-cap behemoths are not cheap, but they are not expensive, either. More important, they have the resources to deliver consistent and steady growth, key traits in this environment.
Oil and food prices are moving higher. That puts a strain on already tight budgets for a majority of consumers. The solution: Shop at Wal-Mart (WMT)?
When the recession hit in 2008, one of the beneficiaries was Wal-Mart. The low-price retailer was positioned perfectly to gain market share -- and it’s a great stock to own if and when things get dicey again.
Last week, Wal-Mart reported earnings results for its fiscal first quarter that beat Wall Street estimates by 2 cents per share. After the report, shares of Wal-Mart traded slightly lower thanks to overall weakness in stocks combined with nervousness over results in the U.S.
That nervousness is misguided, in my opinion. Any weakness domestically is likely to be a one-time occurrence. Wal-Mart’s price advantage for consumers will ultimately result in bigger market share. Add in international expansion and this stock is one to be bought, not sold.
Wall Street expects the company to make $4.44 in the current fiscal year and $4.89 the following year. You can buy that 10% growth for 12 times estimated earnings. That’s a bargain, in my opinion.
Wal-Mart, one of the 20 highest-yielding retail stocks, is a top holding in various Stockpickr professional portfolios, including that of Warren Buffett, whose Berkshire Hathaway maintained its 39 million-share stake in the first quarter. The stock shows up on a recent list of retail giants betting on overseas growth.
While the U.S. economy sputters along, the global growth story is fueling profits for many multinational corporations including Deere (DE). The agricultural and forestry heavy equipment maker is one of those rare instances of a large company growing profits at a healthy clip and trading for a low valuation.
In some ways it is too good to be true. Analysts expect Deere to make $6.24 per share in the fiscal year 2011 ending Oct. 31. That number jumps by 16% to $7.24 in the 2012 fiscal year. At its current price, shares of Deere trade for just 14 times 2011 estimates.
On Wednesday, the company announced results that beat expectations. Deere reported a profit of $2.12 per share for the quarter ended April 30. That was better than the Wall Street estimate of $2.06 per share. In the same report, the company increased guidance for revenues in the current year.
All in all a good report, but what does the stock do? It goes down, of course. If you want to count on meaty earnings that are growing nicely and you can buy shares at a cheap price, Deere is the stock to own in this market.
Big bets on Deere come from Mario Gabelli’s Gamco Investors, which despite cutting its position in the stock nearly in half in the first quarter still holds 1.7 million shares, and Navellier & Associates, with over 616,000 shares.
The dreamers in the market have been calling for a recovery in the housing market for the past few years. The sharp decline in housing simply must end at some point. This all-important industry is long overdue for a turn to the upside.
Hold your horses. Any real recovery in housing has been elusive. In my opinion, the best way to play any boom in housing is to focus on the rehabilitation segment of housing. The do-it-yourself repair business should in theory recover long before new construction.
My pick is Home Depot (HD), one of the highest-yielding retail stocks. Over the last year, Home Depot shares have traded sideways while other names have run higher. I think that changes in the next year. Analysts expect the company to make $2.31 per share in the fiscal year ending in January 2012. That number increases by 16% in the following year to $2.67 per share.
Investors today can buy shares for a price equal to 16 times the 2012 estimate. The company reported results this week that beat analyst estimates by a penny. Any strength in the economy is likely to result in even bigger beats in future quarters.
I like the valuation and the current expectations. Home Depot is a big stock to own in this market.
Home Depot, a holding in Tom Gayner’s Market Gayner Asset Management portfolio, shows up on a recent list of Cramer’s 3 Retail Stocks to Buy.
A common theme that I find with big companies is that they are expected to grow profits by a solid double-digit percentage. At the same time, valuations are right at their growth rates, at least in terms of a price-to-earnings ratio. Other segments of the market are much more expensive.
Dupont (DD), according to Wall Street analysts, is expected to make $3.84 per share in the current year and $4.35 in the following year. Those numbers put the company on pace for a 13% growth rate.
Dupont, one of the top-yielding conglomerates stocks, is on track to meet expectations and then some. For the first quarter, the company beat estimates by 15 cents per share. That is a substantial margin given the size of the company. The reward by the market with such performance was a big yawn. Since the late-April release of results shares have actually declined in value.
I would use that weakness or tepid response to strong performance as a buying opportunity. This large-cap company is cheap by the numbers given expected growth.
Dupont is one of the top holdings of Mark Hillman’s Hillman Capital, comprising 5.4% of the total portfolio as of the most-recent reporting period.
You really have to be a diehard believer to be long Microsoft (MSFT). The software king has rested on its laurels for many, many years. The reward for investors has been a stock stuck in the mud. If you bought shares a decade ago, you have been treading water ever since.
Could the worm be turning? Over the last year, the company is showing signs of life. Its launch of the Kinnect video game system was a big hit helping the company shed its image as being a duplicator instead of an innovator. In addition, Microsoft has been heavily promoting Bing as a search alternative to Google.
Most recently the company has made a bid to buy Skype, showing a willingness to take risks with its huge war chest of cash. So far these efforts have had little impact on Microsoft share price. The stock is trading several dollars lower than where it were trading a year ago.
During the year of declining stock values, Microsoft has beaten earnings estimates in each of the last four quarters. In the most-recent quarter ended in March, the company beat estimates by 5 cents per share. For the full year ending in June 2011, analyst estimates are for Microsoft to make $2.58 per share. In 2012, the company is expected to make $2.77 per share.
Given the performance over the year, my analysis suggests that current estimates for Microsoft are too low. This company should be able to grow earnings by more than the 7%. With shares trading for less than 10 times earnings, the risk reward would seem investors in this mega-cap.
Microsoft, one of the top-yielding computer software services stocks, shows up on a recent list of 3 Big Tech Winners in China. It’s a popular holding in professional portfolios, including those of David Teppers’ Appaloosa Management, with 4.8 million shares, and David Einhorn’s Greenlight Capital, with 9.1 million shares.
To see these stocks in action, check out the 5 Big Stocks for a Choppy Market portfolio.
-- Written by Jamie Dlugosch in Minneapolis.
At the time of publication, author had no positions in stocks mentioned.
Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.