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All Contents © 2017The Kiplinger Washington Editors
By Charles Sizemore
| May 2017
It has been quiet out there. The CBOE Volatility Index — better known as the VIX — just hit its lowest levels since 2007. Moves of even 100 points on the Dow are rare these days, and even most commodities markets have been pretty tame.
Federal Reserve meetings … bombast from President Donald Trump … European elections that could potentially blow up the European Union … It seems that nothing gets more than a casual shrug from Mr. Market these days.
I’m not complaining, of course. Complaining about a market that’s too calm is like complaining about having too much money. We should enjoy this calm while we can because if stock market history has taught us anything, it is that this won’t last forever.
There will be another stock market correction. I can’t tell you when, of course. For all I know, it might be starting today. But when it comes, it pays to be ready for it by having cash on hand and by knowing what you want to buy ahead of time.
So today, I’m going to make a list of seven stocks I’d love to snap up during the next stock correction. All are fantastic stocks I’d be happy owning for years, if not forever. But most are still looking a little stretched at this point, so be patient and wait for your moment.
Prices and data are from the original InvestorPlace story published on May 4, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Anthony92931 via Wikipedia
I’ll start with triple-net retail REIT (real estate investment trust) Realty Income Corp. (O). Realty Income is arguably the safest stock in America. It has paid its monthly dividend for 561 consecutive months and raised it for 78 consecutive quarters.
I’ve written before that I’ve owned shares of Realty Income for years and that I pledged never to sell them. I reinvest my dividends every month, and I intend to live off the dividend in my golden years and eventually gift the shares to my children.
But the shares have been a bit too richly priced for me to consider adding any new capital right now (outside of my automatic dividend reinvestment). As a general rule, I won’t buy a REIT yielding less than 4%, and Realty Income has been at or below that level for a long time.
Well, after the recent selloff, shares might be awfully close to a new buying opportunity. Fear of the almighty Amazon.com, Inc. (AMZN) has scared investors away from retail stocks in general, and Realty Income is now down fully 25% from its recent highs. It also yields a far more respectable 4.6% at current prices.
Realty Income has little to fear from Amazon. Its tenants tend to be convenience stores, pharmacies, movie theaters, and other segments generally not affected by the rise of internet commerce. I would say it’s safe to wade into this stock today, but if the share price dips below $50, you should absolutely back up the truck.
Speaking of Amazon, I would have to include the massive retail disruptor on any list of stocks to buy on dips. Amazon is remaking the world in its image. For all the hype that Apple Inc. (AAPL) generated for creating the smartphone as we know it, I would argue that Amazon has had a far more transformative effect on our lives and on the broader economy.
Not only has Amazon completely upended the retail industry (internet shopping was all but nonexistent prior to Amazon’s rise), it’s now upending the delivery business via the use of aerial drones.
And if that wasn’t enough by itself, Amazon also invented cloud computing as we know it, destroying the business model of International Business Machines Corp. (IBM) and other traditional software and service providers.
Amazon has always looked expensive based on its earnings, which are perpetually depressed by its relentless investment in new ventures. And using the price/sales ratio in lieu of earnings, Amazon still looks wildly expensive for a retail stock. Though if you compare Amazon to other technology stocks, its valuation looks a lot more sensible.
All the same, I’d prefer to wait for a dip before buying. So Amazon makes the list.
For the life of me, I don’t understand why investors weren’t tripping over themselves to buy Apple (AAPL) last summer when it was trading for less than $100 per share. I certainly was. I don’t know that we’ll ever see an Apple share price under $100 again in our lifetimes.
Even at current prices, Apple isn’t what I would consider prohibitively expensive. It trades at a forward P/E ratio of just 14, well below the S&P 500 average. And let’s not forget that roughly a third of Apple’s market cap is sitting in cold, hard cash. If you strip out the cash, Apple is essentially trading as a no-growth stock.
That’s a bit ridiculous. Yes, iPhone sales were disappointing last quarter, and CEO Tim Cook admitted that customers were waiting for the release of the iPhone 8 before upgrading their phones. But any reasonable person should have expected that, and slow growth is already effectively baked into the share price.
All the same, I’d prefer to hold off before making any major new investment. Given that the stock is up by about half since last summer, it makes sense to let those gains digest before adding new money.
Roy Luck via Flickr
I love pipeline giant Kinder Morgan Inc. (KMI), and I’ve owned it for years. I wasn’t particularly happy when the company had to slash its dividend two years ago, but I accepted that it was in the long-term best interest of the company and its shareholders. I think Kinder Morgan is a decent buy at today’s prices, and I expect the stock to really do well once it starts raising its dividend again (presumably next year). But if it dropped by a good 10%-15% from here, I’d be chomping at the bit to buy more.
Kinder Morgan operates one of the largest oil and gas pipeline networks in North America, and the company is very well positioned to benefit from the continued development of onshore energy. Newer developments in the Texas Permian Basin are profitable at just $20 per barrel, and the Trump administration is far friendlier to the energy industry than its predecessor.
So, Kinder Morgan is poised to do very well in the years ahead. And if we can really load up on shares after a good pullback, all the better.
Mike Mozart via Flickr
I sold too soon…
Two years ago, it was hard to find an analyst willing to say anything positive about McDonald’s Corporation (MCD). Only seven of 29 analysts rated it a buy and the consensus opinion was that McDonald’s was dead. Fast casual chains like Chipotle Mexican Grill, Inc. (CMG) had changed American dining habits forever, and greasy fast food was a thing of the past.
Yet when I saw McDonald’s, I saw something different: A high-yielding dividend superstar that had seen its share of ups and downs over the decades yet always managed to adapt. It seems that McDonald’s menu and format get stale about once per decade and have to be refreshed, and the recent retooling was no exception. Led by innovations like all-day breakfast, McDonald’s is back and stronger than ever.
Alas, I sold too soon. I made good money on the stock, but I left a good 15% of upside on the table.
If McDonald’s ever dropped back down into the $120’s, I’d mortgage my house to buy more shares. This is a stock that will likely still be going strong 50 years from now and still cranking out dividends, and it belongs on any list of stocks to buy on a major pullback.
I’m a student of history, but alas, it seems that sometimes I learn the wrong lessons from it. After watching Alphabet Inc.’s (GOOG, GOOGL) Google search engine utterly destroy Yahoo, Excite and the countless other long-forgotten search engines of the 1990s, I drew the conclusion that search engines had narrow moats and were easily disrupted.
Boy, did I get that one wrong…
At the time when Google rose to dominance, the internet was still essentially a land grab and no single portal was dominant. But by the mid-2000s, Google practically owned the internet. Virtually every website in the world is specifically optimized for Google search, and Google rakes in about a third of all digital advertising revenues.
Alphabet trades for 24 times forward earnings, which is pricey but not completely unreasonable for a company of Alphabet’s quality. If this stock had a 10%-15% correction, I’d be very tempted to nibble on the shares.
I’m the first to admit that I massively underestimated Facebook Inc’s (FB) potential. I was skeptical on social media — and still am in a lot of ways — but Mark Zuckerberg has successfully transformed Facebook from a novelty for bored college kids to arguably the second most powerful company on the internet after Alphabet. Facebook continues to squeeze more revenue per user out of its legacy Facebook page, and it has barely scratched the surface in monetizing its other products, such as Instagram and Whatsapp.
Twitter Inc. (TWTR) is still trying to figure out what it wants to be when it grows up, and Snap Inc. (SNAP) may not even exist five years from now. But Facebook, virtually alone among social media companies, has found a durable profit model.
Facebook trades for 22 times forward earnings, which is very reasonable for a high-growth company. But if the stock price were to drop a good 10%-15%, it would be an absolute steal.
This article is from Charles Sizemore of InvestorPlace. As of this writing, he was long O, KMI and AAPL stock.
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