The screaming you hear is everyone running for the exits in the stock market. Times like these should be welcome for value investors looking for stocks to buy, and who have cash on the sidelines.
The market is not only in the midst of a correction, but the charts show we are in a bear market. That means that rallies are more likely to be short-lived, and that chart patterns will resolve to the downside more often than not.
So if you have cash, which you should, and you have stocks to buy at the right moment, there could be some great bargains out there.
It’s often a chance to get into some long-term core stocks at good prices, so I’ve put together a shopping list for three stocks to buy that I really want to get into, along with a frame of small-cap stocks that I want to mention because they are just too cheap to pass up on.
Stocks to Buy in a Crash: Starbucks (SBUX)
Starbucks Corporation (SBUX) is my first choice of stocks to buy. It has not been too badly impacted by the bear market yet, and its results from the last quarter — despite some headwinds in China — show SBUX stock and the company are pretty resilient. SBUX stock is trading at $58, about 10% off its all-time high.
Starbucks has become intertwined with the American experience, and has been on a generally wise path towards expanding its in-store products as well as opening new stores around the world.
While China is the last frontier, I would actually count more on organic expansion within its product base.
Including its dividend, analysts see 20% YOY growth over the next five years.
Now, I’m willing to give SBUX stock a 26x premium estimate, so if you can get the stock below $50, I think that’s a bargain. However, I would only open a half position. A bear market means you have to enter your new positions a bit at a time.
Stocks to Buy in a Crash: Amazon.com, Inc. (AMZN)
Amazon.com, Inc. (AMZN) is not your everyday stock.
Because Jeff Bezos seems more interested in experimenting with so many other possible revenue sources, he’s able to take free cash flow and grow the business while also engaging in some venture capital opportunities. I don’t think we’ll ever be able to value AMZN stock on a price-to-earnings basis. Some say that means we should stay away from it and not include it on a list of stocks to buy.
I’m not so sure.
While I’d like to say AMZN stock is good to buy and hold for a long time, I don’t think you can comfortably do that above $200 per share. I don’t think we’ll see that.
However, Amazon can make a supremely profitable mid-to-long-term trade. The market has a way of bidding AMZN stock up in good times and bad. If you get shares, you can even turn around and sell covered calls against it for big premiums.
If AMZN stock falls below $400, I would buy and set a 7% stop loss.
Stocks to Buy in a Crash: Walt Disney Co (DIS)
Walt Disney Co (DIS) is hurting these days, off about 25% from its all-time high of $122. Much of the decline has been driven by worries about ESPN, coupled with the bear market.
ESPN accounts for a lot of DIS stock revenue and earnings, and concerns are legitimate.
The relaunch of the Star Wars movie franchise will offset some of this.
I’m not terribly concerned about ESPN, because sports is also part of American culture, and I think Disney will figure out how to reposition the brand and its offerings.
On a valuation basis, things have gotten interesting. DIS stock trades at around 19x net income. Based on combined five-year annualized EPS growth rate estimates of 12.27%, and the 1.47% yield, we get a fair P/E ratio of around 13.75. I give a 10% premium for each of the following: free cash flow, balance sheet and brand name. So paying 17x for DIS stock is not unreasonable.
I think you start to nibble at DIS stock at $85, and buy more aggressively if it falls to $75
Stocks to Buy in a Crash: Small Cap Offerings
I frankly think the best bargains, those with the best long-term chances of providing the biggest returns on your investment, are in the small-cap arena. The market tends to sell these off the fastest. Here are some stocks I own and am adding to thanks to market irrationality.
Ashford Hospitality Trust, Inc. (AHT) is a company I write about often. It is the best-managed and best-positioned hotel REIT, and selling at the outrageously low price of $5.45. That is below the 2003 IPO price, when the company had far fewer properties or earnings potential. This is an easy double, and it pays a very sustainable yield of 9.7%.
Its spinoff, Ashford Hospitality Prime Inc (AHP), is actually up for sale. I put its true value at around $22 per share based on cap rates I see in the private market, yet it sells for $11.29 with a 3.7% yield. Another slam-dunk double.
Enova International Inc (ENVA) is an online consumer and small-business lender. It has been transitioning away from payday lending into installment loans, near-prime loans and small business loans. At under $6 per share (and down to $4.64 recently), it is 75% off its high. It should be trading closer to $15 now, and $30 in the next three to four years.
As of this writing, Lawrence Meyers owns shares of SBUX, DIS, AHT, AHP and ENVA.
