After a year with barely a pullback, the market is finally correcting. We’ve written a lot about how to limit your losses while the correction plays out, but what if you’ve got some dry powder and you’re looking for opportunities to make money? I’ll tell you what I think are some of the best stocks to invest in right now. But before I do, you need to follow three simple rules for investing in this suddenly volatile market.
First, be careful. They say “never catch a falling knife” for a reason.
Second, limit your bargain hunting to quality stocks. That means companies with good fundamentals, plenty of institutional ownership, and ideally a long dividend history that proves earnings are reliable.
Third, be opportunistic. That means finding stocks that are offering unique buying opportunities thanks to the selloff. Here’s what my colleague Crista Huff wrote about buying low in her premium advisory, Cabot Undervalued Stocks Advisor, a couple days ago:
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There are different approaches to take: you can buy stocks in a strong sector (financial stocks), you can add to positions that you already own, you can buy stocks that you’ve earmarked for such a time as this, you can buy stocks of quality companies that seemed to fall a drastic amount, you can buy stocks of quality companies that barely fell. All of those are valid approaches to “buying low.”
Putting all three criteria together, I’ve put together a solid list of quality companies offering unique opportunities right now, without too much risk. Here is my list of the five best stocks to invest in right now:
#1 Best Stock to Invest in Now: Citigroup (C)
As Crista said, financials have recently been so strong that they’re likely to be leaders again once the correction ends. And C has been one of the strongest stocks in the group.
Citigroup took a long time to start its recovery from the financial crisis, when the bank’s stock fell a whopping 96%. But Citi has spent the years since the crisis raising capital, recruiting talent, buying back shares and expanding internationally. Today, less than half of the bank’s revenues come from North America.
U.S. regulators recognized the bank’s transformation last year, giving Citi permission to double its dividend and increase stock buybacks by more than $15 billion. Investors began piling into the stock, driving C up nearly 40% in twelve months. The relentless advance didn’t give investors many opportunities to start positions.
So Citi’s recent dip below its 50-day line—the stock is about 10% off its recent high—is a unique opportunity. In addition to double-digit earnings growth, C investors can look forward to rapid dividend growth. Citigroup increased its dividend by 150% in 2016, followed by a 100% increase last summer.
#2 Best Stock to Invest in Now: Caterpillar (CAT)
Caterpillar makes heavy machinery and vehicles used in the construction, mining, energy and transportation industries. CAT had a fantastic 2017, leading industrial stocks in a rally fueled by strong economic growth. The stock gapped up on earnings in April, July and October.
But CAT ran out of gas after Caterpillar reported earnings in late January. Revenues were up 35% year-over-year, and everything beat estimates, but analysts were puzzled by Caterpillar’s decision not to provide 2018 revenue guidance. The following pullback brought CAT down to 160, about where it started the year.
Then last Monday the stock sliced through its 50-day moving average, erasing two months of progress. The stock is now some 13% off its all-time high, offering a better value than it has in months.
Analysts have actually been raising their 2018 and 2019 estimates recently, despite their lukewarm reaction to the January earnings report, and now expect Caterpillar to deliver 12% revenue growth and 32% EPS growth in 2018. In 2019, earnings are expected to grow by another 16%.
CAT is also a very reliable dividend payer, the company has paid dividends since 1925 and currently yields 2%. That makes the stock a great “buy low” candidate.
#3 Best Stock to Invest in Now: Emerson Electric (EMR)
Emerson Electric is an industrial conglomerate with a high 2.8% dividend yield. The company just went through a multi-year restructuring to divest itself of small interests and focus on two core businesses. The first, Commercial & Residential Solutions, includes heating and cooling systems, construction and plumbing tools, ceiling fans and more. Offerings of Emerson’s other core business, Automation Solutions, include industrial equipment and consulting services. Customers include the auto, energy, marine and medical industries, among others.
Emerson has paid a dividend since 1957 and has increased the dividend every year for 60 years, making the company a “Dividend Aristocrat.” Dividend increases became smaller during the restructuring, but growth is returning. Analysts expect Emerson to deliver 15% EPS growth this year and next. That should translate into faster dividend growth as well.
Investors looking forward to the new era began piling into the stock last year, driving EMR up 25% between November and January. But the current pullback has brought EMR down to its 50-day line, giving investors who don’t own it yet an opportunity to start a position in a high quality stock at a discount.
#4 Best Stock to Invest in Now: Intel (INTC)
Intel was pretty cheap even before the current pullback, with a P/E of about 16. Now it’s even cheaper, and the stock’s yield is up to 2.7%.
Processors are the name of the game for Intel. The company had a slow few years recently, falling behind its peers in technology adapted for the cloud and mobile devices. INTC stock stagnated for most of the last three years. But that’s now changing: Intel acquired Mobileye this summer, giving the company a lead in self-driving car technology. In September, Tesla (TSLA) announced it is switching from Nvidia to Intel processors for its infotainment systems. Also last month, the company revealed a game-changing new desktop processor. A few days later, INTC broke out to a new 10-year high.
In other words, though it still has shortcomings in a few areas, Intel has quickly become the technology leader in some of today’s fastest-growing computing markets.
Revenue and EPS growth are both in the single digits, but are accelerating. Even better, margins are rising, while the company’s payout ratio has declined toward 40%.
The stock’s current advance started at the end of August, so it’s not overextended, and the rally is likely to continue after the broad market correction plays out.
#5 Best Stock to Invest in Now: Microsoft (MSFT)
Microsoft has beaten earnings estimates in each of the last three quarters, helping to send the stock 37% higher in 2017. Compared to that gain, the stock’s 10% pullback since the correction started looks pretty reasonable. The stock closed a little below its 50-day moving average last week, but is still well above its 200-day.
Investors who buy MSFT here can look forward to 11% sales and EPS growth (average estimates for this year) and locking in a 1.8% yield on cost.
And, as one of the oldest tech giants, Microsoft has a much stronger dividend history than many of its peers: the company has paid dividends since 2003 and increased its dividend in each of the past 13 years. Today, Microsoft’s dividend is nearly double what it was five years ago.
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