by Jeff Reeves | May 1, 2012 5:30 am
The 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).
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.
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.
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.
Fusion-io admittedly has been disappointing since my recommendation last month. Shares were driven down largely because of earnings on April 26. The good news was that the “data decentralization” company posted record revenue of $94.2 million for the fiscal third quarter of 2012, up 40% from $67.3 million for the same quarter of 2011 and up 12% from $84.1 million for the prior quarter. The bad news was that FIO posted a tiny net loss for quarter of $4.7 million, or 5 cents per share. That was compared with a small profit in 2011.
But Fusion-io is very much a startup, so I’m not inclined to panic over these numbers. In fact, in the past 90 days alone this stock has seen a very wide range of about $22 to $32 a share, so anyone watching this stock shouldn’t be surprised by the volatility. The company went public less than a year ago and boasts big-name clients including Apple (NASDAQ:AAPL) and Facebook. I think FIO still is a strong buy for investors looking for a next-generation tech stock to add to their portfolio.
JPMorgan has rolled back about 6% as the market has slowed down and financial stocks have cooled off. After reporting earnings April 13, investors were encouraged by strong investment banking results and improvements in mortgage revenues. Net income was up strongly from $3.7 billion in 2011 to $5.38 billion in this latest quarterly report. The downside was that a lot of this came from one-time gains — a $1.8 billion pretax benefit from reduced loan-loss reserves, a $1.1 billion pretax benefit from WaMu’s bankruptcy settlement and other items. So on the whole, investors weren’t all that impressed.
However, I remain convinced that more is more and that, in the long term, JPM will be a great buy. I continue to recommend JPM for long-term investors, especially income-oriented portfolios. JPMorgan yields 2.7% with the Federal Reserve breathing down its neck — so just imagine what the dividend could be in a year or two if its balance sheet continues to mend. If and when a recovery happens, banking stocks are going to benefit — and as the biggest player in banking by assets, JPM will perhaps benefit most.
Here’s a full breakdown of performance of my Editor’s Picks from my initial recommendation, compared with the performance of the broader market.
Other stocks previously recommended in my Editor’s Picks include Alcoa (NYSE:AA), Caterpillar (NYSE:CAT), Intel (NASDAQ:INTC), Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). Strangely enough, not a single one of these picks moved more than 2% up or down in the month of April despite earnings. I continue to believe all of these investments are a good addition to your portfolio.
Alcoa: Once again, AA kicked off earnings season with a bang and reaffirmed my bullish call in the stock. Read about strong AA earnings in a post from April 11, or read my original recommendation of AA. (Disclosure: I personally own Alcoa stock).
Caterpillar: The machinery giant put up record first-quarter profit still easily beat Wall Street expectations. Shares have slowed down after a great start to the year, but I expect the run to continue. Read about strong CAT earnings in a post from April 25 or read my original recommendation. Dividend note: Caterpillar also will pay a 46-cent dividend in May 19 to anyone who bought in before April 19.
Intel: I recently wrote an article about the prospect of buying a stock for a newborn, and sitting on it for 20 or 30 years as an inheritance. My pick for just such a strategy was Intel (read about why here). Intel just launched its smartphone chip and posted decent earnings even though revenues were flat. I remain bullish on Intel in the long term. Read my original recommendation. Dividend note: Intel goes ex-dividend on May 3, paying 21 cents a share on June 1.
Apple: What’s not to like about Apple? When it was logging consecutive declines, I reaffirmed my buy recommendation – and I hope you heeded the advice. Apple popped 9% after earnings to prove it had its mojo back and reclaimed the $600 mark. Read about Apple’s great earnings in a post from April 24 or read my original Apple recommendation.
Microsoft: I recapped a strong earnings report for Microsoft on April 20 that show how the company is seeing continued success from legacy software like Windows. The momentum on MSFT has waned considerably since a nice run to start 2012, but I remain convinced it’s a strong long-term investment — especially with its 2.5% current dividend yield. Read my original recommendation on Microsoft for more. Dividend note: The company will pay out 20 cents per share on June 14 to shareholders who own the stock before May 15.
To be crystal clear, I have a personal stake in Alcoa, Goodyear and Arch Coal. I bought each of these stocks at approximately the same time as my recommendations to you on InvestorPlace.com. This is partly because I want to put my money where my mouth is, but more so because I want to invest in stocks that go up — and I believe the profit potential in these picks is very real.
I have an open track record on all of my Editor’s Picks recommendations here, but I encourage you to email me at email@example.com or use the comment section below to speak your mind. I want these trades to be profitable for you, but most of all I want to earn your trust — so don’t be a stranger.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves was long AA, GT and ACI.
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