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5 Falling Knives to Catch in 2015

After some recent market volatility driven by a major selloff in Chinese stocks and fears of a political crisis in Greece, there is no shortage of risks floating around as we close the books on 2014.

falling knives

And outside of the macro picture, there are plenty of stocks with specific problems of their own — including, for instance, McDonald’s Corporation (MCD) which reported yet another same-store-sales drop with an ugly 4.6% decline in November.

It has been a long time since the market has given us a prolonged period of declines, and many investors are worried that 2015 could bring us a serious correction in equities. After all, valuations are starting to look stretched and many traders are leery of buying a top.

But if you feel this way, why not focus on some of the less-popular names on Wall Street, then, that already have a host of negativity priced in?

If you’re concerned about valuations or buying a company that has run up too far on sentiment, there are a number of battered companies out there worth a look for patient, long-term investors seeking outperformance in 2015.

Here’s a list of some battered, bargain buys I’m watching right now that could be great trades for those looking to catch a falling knife in the weeks ahead.

Netflix (NFLX)

Netflix, Inc. (NFLX)Sector: Consumer services
Market Cap: $21 billion
YTD Return: -7%

Netflix, Inc. (NFLX) has seen its stock tumble lately in the wake of poor subscriber growth and disappointing Q3 numbers reported recently.

Specifically, weakness in the all-important U.S. market caused a gain of 3 million subscribers — well under both Netflix and Wall Street targets, sparking a big decline in the stock and pushing it into the red year-to-date as a result.

But remember, Netflix is still growing — and that counts for something.

Competition has admittedly heated up from the likes of HBO Go and Hulu, but Netflix is still the gold standard in the business. And I, for one, am not all that concerned about Amazon.com, Inc. (AMZN) and its Prime Instant Video. Most Prime subscribers don’t even see the video archive as their top draw to the service, and the drag on profits is actually hurting AMZN — meaning the company might (and should) abandon its efforts to unseat Netflix.

The story here is not a high earnings multiple, which is normal for NFLX stock, or volatility, which is equally normal. Rather, the real story is the potential of Netflix to become a global power in the long term. I mean, in what other universe is adding 3 million people, to a total viewership of over 53 million, a death knell?

NFLX is spending big-time on content acquisitions and original programming, as evidenced by its pricey new series Marco Polo. Furthermore, its chief content officer has said the company has aims “to see the product be completely global, available everywhere in the world” in just five years’ time.

Throw in the fact that analysts keep moving down targets, creating easier hurdles for NFLX to hop across in 2015, and it adds up to the potential for a bargain buy in one of Wall Street’s best growth stories.

The volatility is cause for concern. But if you want to catch a falling knife, NFLX stock could be it. Remember, this is a company that soared to $300 a share in 2011, crashed to under $100 in 2012, then made that all back in 2013.

Clearly Netflix stock has a history of big swings both ways, and the current pullback could simply be a big buying opportunity before the next leg up.

Ford Motor Company (F)

Ford Motor Company (F)Sector: Auto manufacturing
Market Cap: $59 billion
YTD Return: -2%

Ford Motor Company (F) seems like the kind of stock that investors just don’t trust right now. While the company certainly has fought back from its troubles during the Great Recession and consumers are looking strong right now, it won’t take much to drive Ford lower in 2015 if car and truck sales dry up.

But I don’t think that will happen.

After success with some redesigned models in 2013, Ford upped the ante this year by giving its flagship F-150 an aluminum body panel, aimed at boosting fuel efficiency and performance. The company has invested $1.4 billion in factories for these new lighter trucks, which won’t reach full capacity until mid-2015. This is a big gamble, but one with big potential payoff.

And big picture, overall auto sales have actually been very strong — and should be red-hot again in 2015 based on all metrics. Ford’s president of domestic operations recently predicted the industry’s highest U.S. vehicle sales since 2001. J.D. Power was only slightly less optimistic, putting dealership sales at just over 13.8 million to mark the highest levels since 2004.

Right now, Ford has a forward price-to-earnings ratio of less than 10 — much lower than the broader market. You might point out that as slow-growth, cyclical stocks, it’s natural for automakers like Ford to trade at a slight discount to the broader market; however, the S&P 500 has a significantly higher overall valuation with a forward P/E topping 17. And other cyclical manufacturers including General Electric Company (GE) and Caterpillar Inc. (CAT) trade at forward P/Es of around 15.

As for income potential, Ford not only reinstated its dividend in 2012, but has ratcheted up payments an impressive 150% since then thanks to reliable and growing profits. It now yields around 3.2% — significantly better than the roughly 2.2% yield on 10-year Treasuries.

You could do worse than take a flier on this auto manufacturer as it continues to rev up in 2015.

Halliburton Company (HAL)

Halliburton Company (HAL)Sector: Oil & Gas Services
Market Cap: $32.5 billion
YTD Return: -23%

Energy prices have been in a tailspin across 2014, and stocks like Halliburton Company (HAL) have paid the price. As an oilfield service company that focuses on energy services around the world, Halliburton operates in 80 countries — but the energy industries in almost all of them are having a rough go of it right now.

However, after a big fall from grace this year, it’s hard to argue that the negativity is not priced in. And considering the scale of Halliburton and the persistent need to service oil fields at a minimum level regardless of crude pricing, it could be worth considering a bargain buy in this oil stock.

Wall Street seems to think so; Consider that Oppenheimer just started HAL stock at an “outperform” rating with a price target of $71 a week ago — almost double its current share price.

Halliburton also offers a modest dividend yield of 1.9% at current pricing, and considering its dividend has doubled in short order, from 9 cents quarterly in 2012 to 18 cents currently, there’s a good chance that payout could keep rising. Throw in the fact that earnings are just 17% of next year’s projected earnings despite this tough environment and it’s difficult to overlook the power of long-term dividend growth here in HAL stock.

With a measly forward P/E ratio of about 9 right now, Halliburton might offer a great bargain buy for those who aren’t afraid of a little short-term volatility and are convinced that oil prices can’t fall much lower in 2015.

International Business Machines Corp. (IBM)

International Business Machines Corp. (IBM)Sector: Technology
Market Cap: $160 billion
YTD Return: -13%

While most of the large caps on Wall Street bounced back handily from their October troubles, International Business Machines Corp. (IBM) hasn’t gone anywhere for about two months in the wake of a very disappointing Q3 earnings report.

Specifically, IBM continues to see revenue shrink and posted profits and outlook that didn’t meet Wall Street’s expectations. IBM continues to divest itself from hardware, and it seems to be a painful transition for the blue-chip tech giant.

However, I wouldn’t count out IBM forever. This could, in fact, be a great buying opportunity for long-term investors.

IBM is one of those mega-cap tech stocks that have a place in almost any portfolio. For starters, there’s the 2.7% dividend yield and a history of payouts since 1916. There’s also the stability that comes with a company that does roughly $100 billion in annual sales and sports more than $14 billion in cash and investments on its balance sheet.

But most importantly, there’s long-term growth potential in IBM. Like many enterprise technology stocks, IBM has hit a rough spot as IT spending has remained challenged. That has come while it is making strategic shifts away from hardware and more toward “the cloud,” which has created a lot of pain.

But as the global economy continues to improve in 2015 and into 2016, technology spending will increase in kind. After all, businesses can’t suffer through with old servers and support products forever.

While revenue growth admittedly remains challenged, don’t forget the power of stock buybacks. IBM reported 991.8 million shares of basic, common stock outstanding as of Sept. 30, down from 1.18 billion shares in September 2011. That’s a reduction of 16% in total shares outstanding in just three years!

IBM is trading around its lowest levels since mid-2011. And while there are good reasons the company has sold off given its stagnant top line, now that it sports a forward P/E ratio of less than 10, there are reasons to consider a bargain buy in this fallen tech giant.

iShares MSCI Emerging Markets Index ETF (EEM)

iShares MSCI Emerging Markets Indx (ETF)Sector: Emerging Markets
Assets: $35 billion
YTD Return: -5%

OK, so the iShares MSCI Emerging Markets Index ETF (EEM) isn’t a stock. It’s actually a basket of stocks, trading as an ETF — but it’s also one of the most popular ways to play emerging markets on Wall Street.

And I think now is the time to make a strategic move into foreign stocks in preparation for a rebound in 2015.

While the U.S. stock market is starting to push above long-term averages in regards to its valuation vs. earnings, emerging-market stocks remain super cheap by any measure. Consider CAPE or “cyclically adjusted price-to-earnings” ratios for emerging markets. If you’re concerned about America boasting a CAPE rating of about 28 right now, look to China’s reading of about 17, or Brazil’s reading of under 10.

And outside of the valuation issues at home, the rest of the developed world isn’t looking very healthy at all when it comes to growth projections. Europe is very much at risk of a triple-dip recession after the recent turmoil in Greece and continually falling prices in many regions of the eurozone, and Japan is forecasting a meager 1% growth rate as its economy stalls out again.

Why not look to a broad emerging-markets play like EEM to fill in the blanks?

Besides, it’s important to remember that a good investment portfolio is diversified. If you have a crystal ball that tells the future, it makes sense to go all-in with a small number of investments that will outperform … but the rest of us need to be realistic.

If you want to buy a bottom but do so in a low-risk way, take a position in this broad emerging-markets fund in 2015.

Get more information on the iShares MSCI Emerging Markets Indx (ETF) on the EEM’s official iShares page.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

Article printed from InvestorPlace Media, https://investorplace.com/2014/12/5-falling-knives-nflx-f-ibm-hal-eem/.

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