The recent falling of the market to 1997 lows put a lot of stocks on sale. While I do not necessarily think that the market has hit its lows, I do think that some companies are worth averaging in to. Below I briefly describe what stocks I have began to buy, with a horizon of 1-3 years. I am investing using money I have allocated for high risk investments, as I am keeping the rest in cash until the markets settle. I do, however, believe that the reward of well-researched long term investments outweigh the risks.
JP Morgan & Co. (NYSE:JPM)
I allocated just under 10% of my portfolio to JPM at an average price of 16.23. I think this is a investment with a fair amount of risk; I have read many reports arguing both sides of the JPM trade. I, however, feel that they will emerge from this crisis as the strongest of the financial companies. While there is some fear about large derivative positions, I am betting that JPM ends up the leanest and meanest bank when the dust settles.
Diamond Offshore Drilling (DO)
DO owns and operates offshore oil drills and rigs. They rent these out to oil companies for hundreds of thousands of dollars a day. While they are subject to movements in oil prices (I am bullish on oil), most of their revenues come from long term contracts. Goldman Sacs analysts estimate 89% of 2009 revenues and 74% of 2010 revenues are already locked up through these contracts. Better yet, the company trades a current 2009 price multiple of 5.69 on EPS of 10.37 and a 2010 P/E of 5.66 on EPS of 10.41. The company is a absolute bargain in terms of growth, as the 2010 PEG (using next 5 year estimates of 20%) is .284. All of this makes me confident in a position of DO. While I currently only hold 5% of my portfolio at a price 58.84, I plan to up this to 15% on the next down day, hopefully for under 57. Potentially the best part of DO is the yield. While the dividend is a measly .12, the special dividend payment of 1.88 per share leads to an annual return of 13.55%.
Altria Group (MO)
I have put approximately 10% into MO at a price of 16.00. The infamous Altria Group is the one of the largest cigarette companies in the world. Not only does this mean they sell a largely inelastic product, but recent legislation could create a de facto monopoly market positioning. A bill that would make entry into the cigarette market essentially impossible is in the works, and if passed Altria will be sitting pretty. Right now MO is trading at a 2009 P/E of 9.64 and a 2010 multiple of 9.16. MO is mediocre on the value front, as the '10 PEG is 1.02, but the potential market positioning of MO more than compensates.
PowerShares DB Crude Oil Double Long ETN (DXO)
I would not consider this a buy-hold long position. As of now, I only hold a small position at 2.31, and do not intend to hold at this price. While I am not holding DXO long at 2.31, unless it never goes down again, I am very bullish on oil. I plan to move a substantial percentage of my portfolio into a oil ETF not as heavily leveraged as DXO (perhaps USO). With fair value of oil estimated by most analysts at around 60-70 a barrel, there is substantial upside with oil trading at 44. With the recent OPEC new to keep production steady, I expect oil to drop again, and I plan to jump in.
Active Trading
I plan to keep 30% of my money in order to make active/swing trades. One of my favorite plays is with DXO. I also look for value buys of financials that get battered by news, then pop. I recently moved 15% into Citigroup (C) at an average price of 1.03 after heavy selling. My reasoning was that I expected the market to bounce of recent lows, C is strongly tied to the market and money would flow into C as people watched it get hammered for days. I sold last Friday at 1.85. I plan to keep cash available for plays like this, because they help buoy losses on long term picks and because they can be used, if needed, to create income.
Watchlist
General Electric (GE)
Google (GOOG)
Microsoft (MSFT)
US Steel (X)
Honda (HMC)
Caterpillar (CAT)
Gold/Treasury Short
I am considering shorting US treasuries the next time prices spike. The race to quality this crisis has stimulated, while currently founded, will eventually be unfounded. Treasury prices will then be in a bubble, and a short on them could be a profitable contrarian play. A similiar play would be shorting gold. Investors seeking protection from falling equity prices and a volitle currency market have rallied the gold market once again. Like I did a year ago, I am calling bluff on gold prices. I do not see much more upside on gold, and when equities start to climb investors will want in on the action, pull their money from gold, and prices will return to normal levels. This, however, is assuming that inflation does not become an issue. If inflation does, then gold could act as a harbour. Monitoring inflationary pressures will be paramoun in the coming months.
High Risk/Reward Play
I will also allocate a very small portion (<5%)> risky play on one of the companies that has been destroyed during this crisis. Examples of these companies include Citigroup, Freddie Mac (FRE)/Fannie Mae (FNM), AIG (AIG), Ambac Financial (ABK), Ford (F), General Motors (GM). The premise of this investment is that this money will probably lose some value, may lose all its value, or may be may make a great amount. A trade with a company like FRE, which has been trading under 50 cents, offers huge upside in the long term if it makes it through the crisis. It also, however, has major bust risk. A small position, while a large gamble, could only have to work out as few as 5 times out of 100 in order to make it a profitable one. While I have not chose this stock in my portfolio, I will definitely add one.
I will update with any additions/subtractions from my portfolio. I will also detail any active trades I make. Please leave me your comments, opinions and criticism.
