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6 Crash Stocks to Buy Now - 16012 views
BALTIMORE (Stockpickr) -- Mr. Market’s looking especially strong right now -- which is all the more reason to load up on “crash stocks.”
Worldwide, stocks have managed to turn out a prodigious rally in the last week. At home, the S&P 500 has climbed more than 8.7% in those last five trading sessions -- a push higher that looks like it’ll continue as of this morning’s open. As a result, it’s likely that we’ll get a test of the upper bound of the price range that’s constricted stock movements in the last quarter. That’s a crucial resistance level to break through for this rally to continue.
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The added uncertainty factor is why I’m advocating “crash stocks.” First, a little bit on what a crash stock is -- and what it’s not.
I’m not talking about buying up the traditional boring names to get defensive. Instead, a crash stock is a company that sports the combination of a discounted fundamental valuation and bullish momentum and relative strength trends -- that combination makes these six stocks better-suited to defend your portfolio from a bear raid. And it also means that these crash stocks are primed to big beneficiaries if this rally can push through to new ground.
Without further ado, here’s a look at the crash stocks.
Philip Morris International
As the world’s second-biggest tobacco company -- and one of TheStreet Ratings' top-rated tobacco stocks -- Philip Morris International (PM) owns approximately 16% of the tobacco market outside of the U.S. That’s an important distinction; the firm split off from former parent Altria (MO) in early 2008, a move that gave PM the rest of the world while Altria focused on tobacco sales stateside. That left Philip Morris International with a portfolio of incredibly strong brands (such as Marlboro, L&M, and namesake Philip Morris) and access to some of the world’s biggest growth markets.
It’s that growth -- particularly in markets such as Eastern Europe and Asia -- that makes PM such an attractive name. More-established markets in Western Europe provide a dynamic that’s more like the U.S., giving PM the best of both worlds. This name isn’t without its flaws, however. Earning revenues in everything from yuan to euros and reporting in dollars means that recent strength in the dollar can really take a bite out of PM’s earnings.
Still, that problem is likely to be a larger problem in the short term than it will be further out. This stock is clearly a solid choice for income investors. With a 4.72% yield at present, investors looking for both return on capital and return of capital should be buyers of PM.
Digital Realty Trust
Datacenter REIT Digital Realty Trust (DLR) is a niche firm that owns approximately 16.8 million square feet of space used by datacenters, internet gateways and other technology firms -- a specialization that puts the firm in a higher class of defensive income-generation assets. Demand for datacenter capacity has been on the upswing in recent years, particularly as new tech trends such as cloud computing and smartphones overwhelm the locations that are currently available. That factor helps ensure that tenancy rates are high for DLR.
Because DLR’s facilities are both specialized and located around prime geographic areas, tenants’ switching costs are high and competition among new tenants is likely to keep prices for space high as well. The firm currently holds more than 2 million square feet of space for future development; with rates currently at record lows, DLR should be able to expand that available space in the near-term with a very low cost of capital.
Many investors have a misguided view of what a REIT is. DLR isn’t a way to get portfolio exposure to real estate trends. Tenants sign long-term triple-net leases, which insulate the firm from the day-to-day moves of its property portfolio. Instead, this is an income-generation tool that’s much more impacted by datacenter trends. With a dividend yield scraping against 5% at current prices, investors shouldn’t ignore this name right now.
Another tech name on this list of “crash stocks” is Apple (AAPL). The mammoth computer and mobile device firm has been the center of attention lately with this week’s release of the iCloud service and iOS 5 today, the iPhone 4S later this week, and the untimely passing of the firm’s visionary CEO, Steve Jobs, last week.
Jobs’ passing has brought a lot of questions about the future of the firm -- but an executive team that shares his vision, and the creation of Apple University, an in-house training program conceptualized by Jobs himself to keep his way of thinking at Apple, should help to continue the magic that’s been coming out of Cupertino since the iPod was released in 2001.
Investor ennui has been a major problem for shares of Apple -- Wall Street has been underrating this stock lately. A perfect example comes from analysts’ complaints about the new iPhone 4S, followed by record-breaking sales of the device last weekend.
That’s probably thanks to the wild growth that this firm has experienced during and after the biggest economic implosion in most investors’ memories. Still, the fundamentals are there. I’ve talked about Apple’s fundamental status in the past, but here’s a quick refresher: With more than $76 billion in cash and investments on the firm’s balance sheet, more than $80 of this stock’s share price is cold hard cash. That means that right now, the firm is actually trading for a TTM cash-adjusted P/E of 12 right now.
That’s staggeringly low for a firm that’s currently experiencing white-knuckle growth.
Now onto a more traditional defensive name: CPFL Energia (CPL), an $11 billion Brazilian electric utility. Utility stocks have a reputation for being boring, but that’s not been the case lately -- relative strength for the industry has been dramatically outperforming any other industry component of the S&P. Historically, that’s an indication that outperformance is likely to continue.
And CPL is a bit more exciting than most. This Brazilian firm serves more than 6 million customers, providing in excess of 10% of the country’s electric distribution demand. That exposure to one of the strongest economies in Latin America, coupled with legal monopoly status, makes CPL’s growth trajectory all the more impressive.
While there have been some concerns about Brazil -- and depreciation in the real lately -- the concerns are more about a slowing path to growth than a reversal of fortunes. The industrial sector remains a huge driver of both Brazil’s economy and electricity demand in the country. The lack of exposure to the U.S. and a 6.3% dividend payout that’s not denominated in dollars makes this power utility a strong diversification name.
CPL is one of the highest-yielding utility stocks.
Another power play on our crash stock list isn’t a utility -- instead, it’s ABB (ABB), a $43 billion power and automation efficiency firm. ABB’s products are all designed to increase efficiency and save costs for customers, who tend to be utilities or industrial firms that have significant power needs. By reducing power consumption and redundancies at customer firms, ABB has carved out a nice economic moat for its niche.
This is another name that has dramatic international exposure on its income statement. Emerging-market sales are quickly becoming the most important geographic segment of revenues -- and their fragmented nature means that ABB isn’t becoming beholden to the economic fortunes of any particular company for growth.
A global trend toward investing in power infrastructure bodes well for ABB. Because the firm lays claim to some of the best intellectual property and expertise in the industry, its ability to generate efficiency savings outpaces most of its peers and makes the firm’s offerings the first choice for most potential customers.
Procter & Gamble
Finally, there’s Procter & Gamble (PG) -- the name that’s probably the most traditional defensive name on our list of crash stocks. But PG’s popularity as a defensive name is there for a reason; this consumer non-cyclical is well suited to performing at a high level even when the economy and the stock market aren’t.
That robustness is the result of an unmatched portfolio of consumer brands that includes names such as Tide, Gillette and Charmin -- products that consumers are less likely to cut back on even when their purse strings are tightened. After all, cutting back on toilet paper is unlikely to be a cost-savings measure in the average American household. That said, private label brands have been increasing competition for PG, particularly in commoditized products where the firm sells the higher-priced offering.
Marketing is the biggest and best way to combat that pressure -- and PG has been pretty adept at proving its value case to consumers through a big promotional budget. At the same time, the company is pursuing meaningful growth through exposure to international markets. A recession-resistant product base and a history of returning value to shareholders make this a solid, if obvious defensive play.
To see these stocks in action, check out the Crash Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.