(By Street Authority) We're inching ever closer to an official "market correction." The S&P 500 is down almost 10% from its recent peak, which means we'll soon hear that phrase bandied about in the financial media.
These pullbacks are painful but bring a silver lining: good companies see their stocks pushed down to levels that create even deeper bargains for investors.
I've been scanning the market in search of these newly-uncovered bargains, but am also keeping an eye on the stocks I know best -- the ones in my $100,000 Real-Money Portfolio. These are my top stock ideas, and though I could add a fresh stock pick to this portfolio, I'd rather own even more of my favorite stocks, especially now that external events have forced them down along with this market. In a few minutes, I'll tell you exactly what I'm planning to buy with my spare cash...
An excuse to sell
There are only two kinds of stock market environments. The first is in which any news is seen in a positive light, and a company can deliver bad news and not see its stock punished. The second is in which investors fail to respond positively to good news and instead look for reasons to sell a stock -- sometimes sharply. That's where we are right now. It's no fun thinking about buying stocks in such an environment, but it's that contrarian positioning that allows you to outperform the market over the long haul.
The trading action in Cree Inc. (Nasdaq: CREE) is instructive. The company's chief financial officer (CFO) announced plans to leave the firm, pushing shares down 9% on Tuesday, May 22, and down nearly 20% in the past two weeks.
Any time you see an executive leave a company -- especially the person in charge of finances -- you should take note. This can be a red flag that accounting troubles are brewing. Yet in this case, there is a far more prosaic explanation: Cree's CFO is anxious to take on a greater management role, which he will soon have with a new employer. The fact that he plans to stick around as a consultant until mid-June tells you he's not leaving a house on fire.
This stock is now down to levels not seen since early February, and it's too much for me to pass up. Even as I expect more choppy results in the next few quarters (which could push the stock even lower), I also keep sight of the fact that Cree's long-term outlook is very bright.
Ignoring the good news
We learned this week that bond-rating agency Moody's has boosted Ford Motor's (NYSE: F) debt to investment grade. The fact that the upgrade comes during a tough stretch for the global economy tells you just how healthy Ford is. And the move isn't just symbolic. An investment-grade rating gives Ford even greater financial flexibility and should allow it to swap out high-yield debt for lower-yielding debt, saving millions in borrowing costs. And after Ford has shored up its pension fund, the company will have a much freer hand to initiate a major stock buyback or dividend boost. Even as Ford's stock got a modest pop on the news, investors are still largely avoiding this stock, as it hovers near its lows for 2012.
Guilt by association
Even when companies deliver no news, their stock can still get punished. The trading debacle at JP Morgan (NYSE: JPM) has put fresh pressure on all banking stocks, including Citigroup (NYSE: C), which is now down nearly 25% since the middle of April.
More than $25 billion in market value has simply vanished. The fact that shares now trade for roughly half of their projected year-end tangible book value is simply stunning. I've always known this stock will hit speed bumps on its way to a much higher share price, but the current valuations strike me as absurd.
In response to the ever-lower share prices for these companies, I am playing offense. First, I am adding 100 shares to my current 300-share position in Cree. That's a possibly risky move in light of the fact that this company is struggling to meet quarterly forecasts right now, but my 1-2 year time horizon makes me less concerned.
Second, I am adding 100 shares to my 300-share position in Citigroup. This stock is roughly 20% lower than where I first bought it, even though Citigroup's longer-term prospects remain quite bright.
Lastly, I am not adding to my 1,090-share position in Ford. It's already my largest holding, and it would be unwise to have even greater portfolio concentration in this stock. It's a bummer, because shares of Ford below $10.50 are a compelling value in light of the company's current balance sheet and projected mid-decade income statement.
Risks to Consider: I'm wise enough to know that a bottom may not be in for this market. These buys might be premature. But I need to pounce on value and not act as a market timer.
Action to Take --> As noted, I will buy 100 additional shares of both Cree and Citigroup. Please also note that I may send out a short e-mail in coming days announcing plans to sell my 300 shares of the Direxion Daily Small Cap Bear 3X ETF (NYSE: TZA). The current wave of selling may soon exhaust itself, and I'd like to free up that cash for fresh buys. (If you haven't already signed up to receive my latest updates (which are currently at no cost to you), then I highly urge you to do so by following this link. This market can turn on a dime, and you'll want to be on top of things in order to strike while the iron is hot.)
All prices are as of Wednesday, May 23.
|Security (Ticker)||Shares||Initial Purchase Date||Avg.|
|Recent Price||Current Value||Buy Under||Target||Total Return|
|Ford Motor (F)||1,090||01/04/12||$11.44||$10.35||$11,282||$13||$20||-9.6%|
|Ligand Pharma (LGND)||350||02/13/12||$14.87||$11.30||$3,955||$17||$30||-23.9%|
|Marathon Oil (MRO)||200||02/24/12||$35.01||$23.97||$4,794||$40||N/A||-31.6%|
|Direxion Small Cap (TZA)||300||02/29/12||$18.42||$23.02||$6,905||N/A||N/A||24.8%|
|MDC Partners (MDCA)||500||04/09/12||$10.57||$9.31||$4,655||N/A||N/A||-12.2%|
|Weatherford Industries (WFT)||500||05/21/12||$12.48||$12.40||$6,200||$15||N/A||-0.8%|
| ||Security Holdings||$80,986|| || || || |
| ||$ Cash Holdings||$6,184|| || || |
| ||Total Return since January 2012*||$87,170|| || ||-12.8%|
|* Individual security returns are shown as of the date each security was added to this portfolio. However, total returns for the portfolio and the S&P are listed since the portfolio was funded with $100,000 of real money on Jan. 4, 2012. |
Visit this link to view a listing of all previously-closed $100,000 Real-Money Portfolio holdings.
-- David Sterman
David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of CREE, F, TZA, C in one or more if its "real money" portfolios.