10 Editor’s Picks — What to Buy in May

New additions to the free Buy List: Coke and Arch Coal

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10 Editor’s Picks — What to Buy in May

editorspickspromo 10 Editor’s Picks    What to Buy in MayThe market lost ground in the month of April after Monday’s negative close for the Dow, S&P and Nasdaq. So, many investors now are asking themselves if the great mini-bull market since Thanksgiving has at last come to a close.

I do think there are short-term headwinds, considering the trouble in Spain coupled with the continued sluggishness of consumer spending in the U.S. and lingering pain in the housing market. However, corporate earnings were decent, and now might be the time to take some strategic position in beaten-down stocks or long-term growth plays that have the potential to return significant profits to investors patient enough to wait a year or two.

I know, I know … but what about the “sell in May and go away” adage? Wouldn’t it be safer to just sit on the sidelines until the dust settles? Well, sometimes yes. May to October 2011 saw a drop of more than 17% in the market. But then again, in 2009 we saw the market surge 19% in the same May-to-October period. So while sitting out the market might work some of the time, other times it leaves you way behind.

So stop trying to time the market and focus on stocks that have potential over the long term no matter what the broader economic environment holds in the next few weeks. I have a number of buy-and-hold stocks that meet that standard in May — including two new additions to our Editor’s Picks portfolio: Coca-Cola (NYSE:KO) and Arch Coal (NYSE:ACI).

Coca-Cola

There was a lot of fuss last week when Coca-Cola announced it would “split” its shares.

The 2-for-1 Coke stock split will not change the underlying fundamentals of the company — just cut its share price in half and double the shares outstanding. So don’t let this deter you from buying in. If you buy 100 shares of Coke at $80 worth $8,000 and the price stays steady, then after the split you will have 200 shares of Coke at $40 — still worth $8,000.

Stocks split for a number of reasons, but mostly because a “cheaper” stock is more accessible to more investors. These splits frequently preface a strong short-term run, too. Consider that the last time Coke split 2-for-1 in 1996, shares popped 2.5% in the first day of trading and ran up 13% across the next 10 trading days. Shares gained more than 40% in the 12 months after the move, doubling the broader Dow Jones in the same period.

But the split alone isn’t the only reason to buy Coke. Coca-Cola earnings for Q1 were impressive, as revenue increased 6% to $11.14 billion compared with $10.82 billion in last year’s period. Profits tallied $2.05 billion, or 89 cents per share, up from 2011’s net income of $1.9 billion, or 82 cents per share. The all-important international market was strong, with volume up 6%.

And beyond fundamentals, there is KO’s healthy 2.7% dividend, which is as bulletproof as dividends can be. Coca-Cola has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every year for more than 50 years.

Then there’s the huge stake famous investor Warren Buffett began accumulating back in 1988 for his company Berkshire Hathaway (NYSE:BRK.B). The Oracle of Omaha and his investment firm own 200 million shares, or about 9% of outstanding common stock in Coca-Cola.

Coke isn’t resting on its laurels, either. There is news the company is getting into the energy drink business if you believe recent reports that Coca-Cola is making a bid for Monster Energy (NASDAQ:MNST) — though KO has denied it is in talks about a deal.

Yes, shares are up against a 52-week high. But if you’re waiting for Coke to roll back significantly, you could be waiting a very long time. I’d get in before the next ex-dividend date (undeclared but likely sometime in June) if you want to buy, but don’t wait too long.

Arch Coal

Disclosure: I actually just put my own money behind Arch Coal this week at $9.60 per share because I like this pick so much. It is indeed a risky buy as a small-cap stock worth only $2 billion that has lost a gut-wrenching 33% year-to-date and more than 70% in the past 12 months. But I remain convinced the stock has been unfairly oversold lately.

As a coal producer operating in Appalachia and the Mountain West, there are a host of ugly headlines weighing on this stock — an EPA crackdown on coal, the fact that natural gas is a cheaper and cleaner energy source, and lower demand from Europe and emerging markets. Still, 2012 earnings are forecast to almost double from fiscal 2011, and the company is riding eight straight quarters of year-over-year revenue increases. Those are very good fundamentals.

Arch Coal reports earnings May 1 and very likely could see poorer numbers than investors had hoped a few months ago. EPS estimates have been steadily revised downward in the last 90 days. But I think the bad news already has been priced into shares after the steep decline in this stock, and it won’t take much to please investors. The new average target of just 16 cents per share still is more than 18% earnings growth over 2011 EPS of 13 cents — so just hitting that mark will be a good sign. Beating that mark could cause a nice pop on May 1.

Even if there’s continued downward momentum for the short term, keep in mind that ACI is soundly profitable and throws off a very nice 4.6% dividend yield. That’s a great buffer even if shares move sideways. ACI has paid dividends since 1997 and has been reliably paying 11 cents per share for four straight quarters, so don’t think this dividend will dry up.

One final note: We have now seen the threat of rolling blackouts in Japan since the country’s hasty decision to unplug nuclear power. It is physically impossible for the world to wean itself off coal anytime soon simply because of baseline demand, and all the environmental critics in the world won’t change China’s appetite for coal in the near term. Coal might not be a primary source of energy by 3012, but in 2012 it’s a staple of the global economy. That means Arch Coal isn’t going anywhere.

For what it’s worth, InvestorPlace contributor James Brumley recently wrote a piece that also was bullish on the coal sector in general and Arch Coal specifically. Read James’ take on Arch Coal here.

Update on April’s Picks

In my April editor’s picks, I offered up Goodyear Tire & Rubber (NYSE:GT), Fusion-io (NYSE:FIO) and JPMorgan Chase (NYSE:JPM).

Goodyear had performed quite nicely right up until earnings, jumping almost 6% while the broader Dow Jones Industrial Average was flat. Then, GT stock had a roller-coaster day on Friday after the company posted quarterly numbers. You can read my in-depth analysis of Goodyear earnings in this separate post, but in a nutshell, the company swung to a loss thanks to a refinancing move that shaved 35 cents per share off EPS figures.

Yes, a quarterly loss is bad. And yes, there admittedly was weakness in sales from Europe and some pessimism about future volume because of the region’s slowdown. But my original thesis of investing in Goodyear was predicated on the fact that this is a turnaround story after a few rough years — and refinancing debts to free up capital and build the business is perfectly in line with that mission. You just have to be patient and look beyond the headline touting a loss. I continue to believe in this stock (Disclosure: I personally own GT shares) and recommend investors get in to ride the recovery of Goodyear.


Article printed from InvestorPlace Media, http://investorplace.com/2012/05/10-editors-picks-what-to-buy-in-may/.

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