How to Handle the Current Market
Tensions are high as investors and media pundits ponder falling oil prices and question the direction of interest rates, the possibility of economic recession and China’s influence over worldwide investment markets.
Every few years, we’re faced with difficult investment markets, as we’re seeing today. During my investment career, I’ve watch big price corrections—and recoveries—take place with junk bonds, U.S. Treasury bonds, technology stocks, the housing market and financial stocks, and precious metals. Sometimes I bought low, and sometimes I sold high.
But the one thing I never did was sell after prices had fallen. I don’t see the logic in that.
Now that we’re experiencing yet another market downturn, I will do what I always do: wait for an apparent bottom, and then urge people to buy low. When U.S. stock markets fell in August 2015, the lowest day was August 25. I published buy recommendations on 14 of my favorite growth stocks each day between August 24 and 27. We proceeded to see U.S. stock markets rise an astonishing amount in October 2015.
It’s too early for me to know if the S&P 500 is ready to stabilize, but when it happens, I will once again issue buy recommendations on every great stock within my purview as their prices stabilize. I want to emphasize, however, that the prices need to stabilize first—when you’re looking at a stock’s chart, it will look like the share price is moving sideways in an organized fashion, as opposed to a price that’s falling.
When markets fall, they fall for myriad reasons, and they take the best stocks down with them. By focusing my investment criteria on undervalued growth stocks, I am confident that I’m identifying the best possible stocks to own. Therefore, I would never sell them during down markets. What would I replace them with? Mediocre stocks? That wouldn’t make sense.
And as a reminder, when I say “undervalued growth stocks,” I’m talking about companies with double-digit earnings growth and comparably low P/Es. Lots of famous companies appeal to investors, from Apple to PepsiCo to Exxon Mobil, but fame is not enough for me. I want the companies that I invest in to have such stellar growth prospects and low valuations, that every portfolio manager in America will see that company as the gold standard stock in its sector.
I’ll hold my undervalued growth stocks, and when they stop falling, I’ll buy more. When they recover—oftentimes within a few months—I’ll own the same great companies that I owned before the market fell, and I will have picked up a few bargains along the way.
I know that it can be hard to conceptually separate a company’s prospects—its financial success—from its stock price. But when markets fall, it can provide a great amount of comfort to say to yourself, “FedEx is still expected to grow earnings by 18% this year, and they just became the second largest package delivery company in Europe due to the purchase of TNT Express.”
A falling stock market cannot hurt FedEx’s business model. As a matter of fact, weak oil prices actually help FedEx’s profit outlook, because they’re spending less money on fuel!
Weak investment markets come and go. Are they unnerving? Absolutely! But each time you live through one, you gain confidence that “this too shall pass.”
In the coming weeks and months, I’ll be identifying buy low opportunities in the Smart Investing portfolios. You are certainly welcome to join me! In the interim, here are updates on five companies I’ve recommended in Investment of the Week since October: Carnival, CBS Corp., E*Trade Financial, FedEx, Legg Mason and Universal Electronics.
Updates on 5 Excellent Stocks
Very little has changed at media and entertainment company CBS Corp. (CBS) since my January 7 report. The company will announce fourth-quarter earnings on February 11.
The market’s expecting earnings per share (EPS) growth of 19.2% at CBS in 2016 (December year-end), which is significantly higher than EPS growth at its largest competitors. In comparison, analysts are expecting 10.1% 2016 EPS growth at Walt Disney (DIS, Sept.), 12.6% at Time Warner (TWX, Dec.), 3.5% at Twenty-First Century Fox (FOXA, June) and 7.0% at Viacom (VIAB, Sept.).
CBS’ majority shareholder, Sumner Redstone, is in very poor health. His ownership of an approximate 80% stake in CBS will transfer to a trust, upon his passing. There will be lots of speculation of potential M&A activity, especially in conjunction with CBS’s four larger, aforementioned competitors.
The price/earnings ratio (P/E) is 11.0, which is at the bottom of its normal annual range of 10–21.
CBS is a very undervalued, large-cap growth stock with a 1.3% dividend yield. As soon as the share price stabilizes, investors should consider buying CBS for growth, and for its attractiveness as a potential buyout target.
Universal Electronics (UEIC) is a manufacturer of wireless remote control products, software and accessories for home entertainment systems.
The company is expected to report fourth-quarter and full-year 2015 earnings on February 17. Wall Street’s consensus earnings per share (EPS) estimates are unchanged since my December 24 report, with EPS expected to grow 7.5% and 21.5% in 2015 and 2016 (December year-end). The 2016 P/E is quite low in comparison to the strong earnings growth, at 13.7, making UEIC an undervalued growth stock.
Universal Electronics’ has three major competitors:
· Sony (SNE, March) has lost money in four of the last five years.
· Dolby Laboratories (DLB, Sept.) is expected to see EPS fall 6.9% in 2016.
· The third competitor is featured in the Smart Investing Buy Low Opportunities Portfolio, with expected 2016 EPS growth of 14%.
The company carries no long-term debt, and the stock does not pay a dividend.
The stock chart on UEIC is more stable than that of many U.S. stocks right now. There’s price support at 45–46. As the S&P 500 index stabilizes, investors should consider buying UEIC for growth.
Legg Mason (LM) is a U.S.-based global investment management company, with 16 subsidiaries, including Brandywine Global, ClearBridge Advisors and Western Asset Management.
Recent stock market volatility has led to weekly outflows from stock mutual funds, and inflows into bond mutual funds and money market funds. This trend will negatively affect fee income for mutual fund companies, with a lesser impact on Legg Mason, because it has such a large fixed-income business.
In other news, Legg Mason is in talks to buy a majority stake in real estate investment manager Clarion Partners LLC for about $850 million.
Legg Mason will report third-quarter 2016 results tomorrow, January 22, before the market opens. Analysts expect the company’s earnings per share (EPS) to grow aggressively by 40% in 2016 (March year-end), then to slow to 11.2% growth in 2017. As I mentioned in my December 10 report, Legg Mason’s earnings growth rate is significantly outpacing that of many large financial companies.
The 2016 P/E is quite low at 10.9, and the current dividend yield is 2.5%.
The stock price has fallen with the weak stock market. Investors will have plenty of time to buy low once the share price stabilizes.
FedEx (FDX) is an international package delivery company. This month, FedEx received approval from the European Union to merge with TNT Express, making FedEx the second largest package delivery company in Europe. FedEx is awaiting merger approval from China and Brazil; China can be somewhat of a wildcard, and won’t necessarily rubberstamp the merger. At this point, FedEx expects the merger to be completed in the first half of calendar 2016.
There is no significant change in FedEx’s earnings outlook since my November 26 report. Wall Street expects 2016 earnings per share (EPS) to grow 18.2% (May year-end). In comparison, FedEx’s only major competitor, United Parcel Service (UPS), expects 2016 EPS to grow 8.9% (December year-end).
The price/earnings ratio (PE) is 11.4, making FDX an undervalued growth stock.
The share price fell with the weak January stock market. Investors will have plenty of time to buy low, once the share price stabilizes.
E*Trade Financial (ETFC) offers financial brokerage and banking products and services.
E*Trade will report fourth-quarter and full-year results this afternoon, after the market closes. Wall Street’s consensus 2015 and 2016 EPS estimates have each increased since my November 12 report, and now call for 4.5% and 35.9% growth (December year-end). The 2016 P/E is very low in comparison, at 14.8.
ETFC is a very undervalued aggressive growth stock. The share price has been weak with the recent market downturn. Wait for the price to stabilize, before accumulating additional shares.
Carnival (CCL) is the world’s largest cruise ship operator, serving 4.5 million guests per year. The company owns nine cruise brands, with over 100 cruise ships, cruise support operations and Canadian and Alaskan tour businesses.
Carnival repurchased approximately $400 million of stock in its third and fourth quarters of 2015 (November year-end) under a $1 billion repurchase authorization. Prior to these share repurchases, Carnival’s number of outstanding shares had remained steady for the last five years.
Wall Street analysts expect Carnival’s earnings per share (EPS) to grow 24.4% and 16.4% in 2016 and 2017. Those numbers have adjusted down and up, respectively, since my October 29 report.
The current dividend yield is 2.4%; and the stock’s 2016 P/E is very low vs. its EPS growth rate, at 14.1.
The stock price fell with the weak market in January, and will likely find price support around 47. Wait for CCL to stabilize before purchasing additional shares.
As always, please feel free to send questions and comments to Crista@cabotwealth.com.
