What to Buy on the Next Correction: Part 1

by Lawrence Meyers | December 12, 2012 7:00 am

“Buy when there’s blood in the streets.” That’s how the old saying goes and … well … there will be blood in the streets again.

Nobody knows exactly when, or even why. Maybe it’ll be a terrible jobs report. Maybe a big blue chip will miss estimates. Personally, I think there will be another downgrade to the U.S. debt rating. Coupled with the recession I believe will strike next year, that’ll be the moment.

Regardless, a correction will happen and, when it does, you should have your shopping list ready.

Here’s my list — some that are “Forever Holds” and others are ones that you’ll want during a recession — along with why they’ve made the cut:

Apple (NASDAQ:AAPL[1]): The company continues to churn out the greatest products, offer the greatest service and has well over $100 billion of cash on its balance sheet. Even better, it’s already in the midst of a correction and — when you back out its cash — it’s a value play. I’d buy it anywhere sub-$500, but a correction could get you in at a price nobody expected Apple to ever see again.

ExxonMobil (NYSE:XOM[2]): This is a “Forever Hold” stock because the world will always need oil; we will never lose our dependency on it and none of the “alternatives” are truly viable. It remains a world-class operation and brand name, and has the best technology and management. Plus, it pays a dividend that yields nearly 2.6%. A 20% correction to $70 would be a great buy point.

Whole Foods Market (NYSE:WFM[3]): There is a certain section of the population that would forego rent before giving up trips to this organic grocer. Whole Foods doesn’t have nearly the store base that traditional grocers do, but it has a fanatical following that bought into the organics movement with every cent it has. Recessions don’t kill spending in every sector and this is one area where it will continue.

Dollar Tree Stores (NASDAQ:DLTR[4]): When times are tough, people who can’t afford the things they used to buy but still need them will rush back to the dollar stores. With the addition of grocery items and other produce, Dollar Tree has been stealing market share from the big grocers. It is superbly managed, has a great balance sheet and generates significant free cash flow. A competitor was taken private at the equivalent of $43 per share for Dollar, which trades at around 10% below that price as it is. A correction would offer a fantastic opportunity.

EZCORP (NASDAQ:EZPW[5]) and First Cash Financial Services (NASDAQ:FCFS[6]): The former is already stupidly cheap at only 7x estimates and the latter is undervalued by at least 10%. These companies own tons of pawnshops both in the U.S. and Mexico. During the last recession, pawn operators like them saw massive increases in revenue from folks who couldn’t get payday loans or other credit and simply pawned items instead. We’ll see that happen again and — with gold up at $1,700 — they’ll be able to scrap items that people pawn for those juicy 40% margins. EZ also recently brought on a new CFO that specializes in acquisitions. With all the cash flow they generate, it’s already a buy.

Coca-Cola (NYSE:KO[7]): Here we have another “Forever Hold.” One of the world’s best-known brands still finds corners of the world that doesn’t have its laundry list of beverage products. Even in a recession, the company churns out billions in free cash flow. It’s pricey now, so a correction gives you the chance to drink it in.

Philip Morris International (NYSE:PM[8]): Recessions don’t change addictions. Enough said.

Portfolio Recovery Associates (NASDAQ:PRAA[9]): Huh? What does this company do? Well, it buys charged off debt of all kinds — usually for 1 to 2 cents on the dollar — and tries to collect it. It brings in a lot of money and takes on little risk doing so. So when times get tough, they’ll buy the debt everyone else is charging off and turn it into real cash.

As of this writing, Lawrence Meyers was long EZPW and DLTR.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  3. WFM: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFM
  4. DLTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=DLTR
  5. EZPW: http://studio-5.financialcontent.com/investplace/quote?Symbol=EZPW
  6. FCFS: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCFS
  7. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  8. PM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PM
  9. PRAA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PRAA

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