So you’ve seen the headlines. There’s a global manufacturing slowdown. There’s a triple-top in the indices. Earnings were fine, but top-line revenue continues to fade. Oh yeah, and that whole European debt crisis and fiscal cliff thing in the U.S. …
What’s an investor to do?
In boxing parlance, you should put your guard up before the body blow comes, but don’t forget to slip a few jabs. Because while the data indicates the market might be thumping your portfolio in the near term, you can score some hits of your own.
After all, there is a double-digit rally in both the Dow and S&P 500 year-to-date, and a setback in the near-term won’t plunge us into disaster territory. And while some folks like Bill Gross are calling for the death of stocks, those death knells historically seem to hearken a recovery more often than they are prescient indicators of a serious downturn to come.
So in short, expect a downturn — and set your sight on some bargains to swoop up when it happens.
If you don’t have some stocks on your watch list, here are six ideas to get you started across a variety of sectors: materials stock Southern Copper (NYSE:SCCO), retailer Target (NYSE:TGT), small-cap IT stock ServiceNow (NYSE:NOW), utility Southern Co. (NYSE:SO), tech blue chip Qualcomm (NASDAQ:QCOM) and consumer staples king Procter & Gamble (NYSE:PG).
I still believe a secular recovery will start to take shape in 2013 despite near-term headwinds. Thus, the opportunity is ripe to get into cyclical materials stocks at a discount. After all, you have to get in early to ride the big leg up. Wait for the gains as proof, and it will be too late.
I particularly like Southern Copper (NYSE:SCCO) for this kind of play. The company’s revenue is strong and earnings have steadily moved higher since 2009 lows, thanks to copper itself moving higher while other metals like aluminum are seeing horribly soft pricing. Looking forward, a budding recovery in homebuilding (or at least a near-bottom) bodes well for copper demand, as does strength in tech and electronics businesses that use copper for wiring and components.
Throw in a nearly 3% dividend yield based on its last quarterly payout of 24 cents annualized (or a 5% yield if want to use the last four consecutive payouts), and you have a strong reason to buy and hold this pick for a year or two.
It might sound counterintuitive to go for a cyclical stock on a pullback, but buying at the top of the cycle inherently means buying a top. So strike on a pullback.
— Jeff Reeves (that’s me)
I’ve known (and recently interviewed) CEO Frank Slootman since he was at the helm of Data Domain — he took that company public in 2007 and sold it for $2.4 billion to EMC (NYSE:EMC) in 2009. In other words, he knows how to get value for shareholders.
ServiceNow develops cloud-based software to help companies manage their IT operations. It is a modular system, which makes it easy for customers to implement and customize things. The ongoing maintenance is low because many of the operations are automated.
ServiceNow competes against big-name players like BMC Software (NYSE:BMC), CA Inc. (NYSE:CA) and IBM (NYSE:IBM), but fortunately for NOW, these operators have invested little in their solutions and have lagged with the cloud. As a result, ServiceNow has been picking off their customers.
In the latest quarter, NOW’s revenues spiked by 93% to $56.8 million, and growth still is in the early stages. Slootman says the global market opportunity is a whopping $50 billion. Growth potential like that is attractive — and it should look even better after an unceremonious broader-market slashing.
— Tom Taulli, editor of IPOPlaybook.com
The income theme in stock picking worked so well this year that it made lots of great defensive dividend stocks look pretty pricey — until recently, that is.
When it comes to dividends and defense, few sectors offer more in the way of payouts and protection than large-cap utility stocks. Of course, that’s hardly a secret, and a buying frenzy made valuations in the sector look a bit stretched.
Happily, Southern Co. (NYSE:SO) has seen its stock cool off significantly since late July, when the risk-on trade came back in force. Shares are down more than 5% since hitting a year-to-date high on July 26, lagging the broader market by about 7 percentage points.
The retreat has made SO’s valuation look much more compelling — especially if the market takes another big leg down. A return of the risk-off trade should lift defensive names like Southern Co., as well as the broader utilities sector.
Furthermore, this is a hardcore defensive stock with little correlation to the broader market. With a beta of 0.13, SO can be thought of as 87% less volatile than the S&P 500. Yes, it lags by a wide margin when everything is going up, but it also holds up far better when stocks sell off.
If you’re worried about a pullback, correction or full-on bear market, SO offers a port in the storm. And with the dividend currently yielding 4.2%, it’s a solid bet that hordes of other traders and investors will scurry for the safety of SO, too.
— Dan Burrows, InvestorPlace Feature Writer
So consider me converted — if not as a shopper, as a buyer of the stock during the next market sell-off.
It’s all just too tempting: The company is nimble in its marketing (it truly has some of the best ads on TV), provides a neat and clean environment in which to shop, offers a wide array of goods and — most important — contains the “hip” factor of a discounter hiding in “chic” clothing. In fact, it’s even cheaper than Wal-Mart (NYSE:WMT).
Target expects revenue to grow just under 5% this year and move up to nearly 5.5% next year, while earnings estimates top out at over a 13% growth for next year as the company’s Canadian expansion hits full stride. The cost of that expansion, and the margin pressure from increased sales from its REDcard discount program, might weigh on the margins for a little bit longer. But down the road they will both pan out well.
A trailing P/E of 14 and a forward P/E of 12 are nice signs of steady if unspectacular growth — and I’m fine with that, especially since I get a nice 2.3% yield. And with a 28% payout ratio, I expect to see more of the same down the road.
During the next market sell-off, I’ll do my shopping at Target.
— Marc Bastow, InvestorPlace Assistant Editor
The company offered a mixed earnings report the next day, but the stock has since traded above $62 due in part to the general uptrend in large-cap tech and the optimism surrounding the launch of the Apple (NASDAQ:AAPL) iPhone 5 and other higher-end smartphones coming before year’s end.
Qualcomm is a growing industry leader in mobile communications, an area that is experiencing secular growth that’s largely independent of broader economic trends. As such, it is a company whose business can hold up well amid the perpetual shifts in the global economic outlook. At the same time, however, the stock itself is volatile: in recent years, it has dropped anywhere from 15% to 25% during the times when the broader market has sold off.
Given that its shares already are trading at about 13.5 times forward earnings once the company’s $12 billion net cash position is factored in, any larger downturn would provide an excellent opportunity to get this fast-growing company at an even better price. The stock has a history of rewarding investors who are willing to buy on weakness, and there has been no change in the fundamental story to indicate that this won’t continue to be the case.
— Daniel Putnam, InvestorPlace Contributor
Procter & Gamble
When the market tanks, it’s time to get defensive, and that means hiding out in defensive stocks that tend to hold up regardless of the wider trend in the market, or the economy. One of the biggest and best of the defensives is consumer products giant and Dow component Procter & Gamble (NYSE:PG).
After watching just a small portion of the Olympic Games this year, I was reminded about just how powerful the presence of P&G products have become worldwide. The company was an official sponsor of the Games, so it’s no surprise we were force-fed commercials about Ivory soap, Crest and Head & Shoulders — the latter featuring one of the biggest Olympic stars, swimmer Michael Phelps. The point here is that the incredible ubiquity of P&G’s global brands is hard to duplicate, and that makes it a great safe-haven candidate when market seas get rocky.
Another reason PG shares are a great place to ride out the storm is the company’s annual dividend yield of 3.4%. Collecting a solid dividend yield always is a great way to keep your head about you when everyone else is losing theirs, and considering P&G is one of the Dow’s top dividend stocks, rest assured it’ll keep you level. As for P&G’s share price appreciation, well, that’s certainly been lacking over the past year, as investors have moved toward the risk-on trade in tech, biotech and even homebuilder stocks.
But if a sell-off of real proportions slaps these sectors in the face, you’re going to see money running for cover — and there’s no better cover than a mega-brand consumer products giant like PG.
— Jim Woods, InvestorPlace Contributor