Investors: If You Must be Long, do it This Way
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Mr. Bernanke is stubborn. He is just not willing to let the market roll over and correct itself – the Fed is keeping the endless spout of money pouring in by purchasing $40 billion of mortgage-backed securities each month.
The Fed does not have a target end date, but will instead keep up its monthly purchases until economic conditions like the unemployment rate improve.
With almost three weeks of no action and low volume preceding the announcement, a major move was bound to happen – and it did. The Fed pushed the S&P 500 up to the 1,467 area, just 6.7% off of its all-time high set in 2007.
With a roaring market I will not be purchasing any equities now, but those with a sustained bullish view may feel differently. Below are three stocks that would jump if the markets stay bullish. But, more importantly, the companies also have the cash flow and strong business fundamentals to withstand a major move downward.
1. ExxonMobil (NYSE: XOM)
Exxon posts a strong dividend of 2.5%, and the company is still a fair value at a price to earnings of only 9.7. Exxon is the United States’ leading producer of natural gas, and the company also is a strong producer of oil.
The risk to Exxon lies in that its revenues are tied to the price of oil, which has recently been moving in tandem with the broad markets. If the markets drop and the economy weakens, oil prices may drop as well.
In contrast to Exxon is Chesapeake (NYSE: CHK), which is anything but stable. Chesapeake is leveraged to the hilt and is forecast to have a gap of $6 billion between operating cash flow and spending, though it plugged the hole with asset sales. This is one of the reasons the company is selling $13 - $14 billion in assets this year. While Exxon could be a nice play, avoid the risky Chesapeake at these levels.
2. Proctor and Gamble (NYSE: PG)
As one investor used to say: "The economy can tank, but consumers will still buy toilet paper." Proctor and Gamble is a consumer staples stock that is diversified globally. Should the U.S. markets decline, Proctor and Gamble is still a strong force in Europe and in China. European consumers are cutting back their purchases, but the company is no doubt testing lower prices or lower-end brands in the eurozone.
In China P&G is unleashing its products on the growing middle class. The firm is a Top 3 brand in a wide array of markets, from toothpaste to skin care products. Also, China adds $6 billion to P&G’s top line.
Wells Fargo (NYSE: WFC)
The financial sector has a tendency to lead the market both up and down, so Wells Fargo could be a gamble here. However, the company pays a healthy dividend of 2.5% and still trades at a reasonable price to earnings multiple of 12. Moreover, Wells Fargo is known for stability, and it originated one-third of new mortgages in the first half of 2012.
Finally, Wells Fargo’s business is steady. Its mortgage lenders are some of the most trusted in the business, and the company often holds events where homeowners with underwater mortgages can meet with Wells Fargo team members to restructure their loans.
On the opposite end of the spectrum is Goldman Sachs (NYSE: GS). Goldman can do well in many different environments because of its brilliant traders, but the company’s stock tends to take a beating when the markets dip.
If the markets deteriorate, expect Goldman’s stock to decline into the 90s or even the high 80s as investment banking revenues from trading and mergers and acquisitions would decline. Further, the current low interest rates leave little room for lending margins.
Overall, be careful investing in this market. The Fed is clearly propping up asset prices in hopes of bolstering the economy and lowering unemployment. But remember that positive markets can turn nasty in a hurry – with even a small flare-up.
While it may be better to avoid buying equities at this time, the companies listed above provide stability and strong cash flow when business gets tough. If you must be long now, give them a strong look.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Wells Fargo & Company and ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, short OCT 2012 $33.00 puts on Wells Fargo & Company, and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Goldman Sachs Group, The Procter & Gamble Company, and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.