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Home > Investing > Investments I’m Watching…When To Buy?

Investments I’m Watching…When To Buy?

Whenever we get stock movement you will get an opportunity to buy some quality investments at attractive prices. First, keep an eye on the macro events to give clues on where to look.

Since the start of 2012, there has been a rotation among sectors. The previous stocks in the dog house, Financials, are now the darlings. Since the start of the year, Bank Of America (BAC) is up over 75%. This is little consolation to those who may have bought BAC when it was trading over 40 a few years ago. Investments like these that have been beaten down so much can make big moves like this simply on whispers or hunches that the economy is improving. Financial stocks as well as consumer discretionary, and energy are considered to be economically sensitive. When the economy does well, these companies should do better because demand increases.

But are things really getting better? The question I would ask is why shouldn’t they? After all the trillions of dollars of stimulus that was released into the economy you would think that some kind of demand would develop. One sign of improvement that is surprising to the upside is automobile sales. The U.S auto sales figure is on track for over 14 million in sales for 2012 (up a lot from the low of about 11 million in 2009). Some analysts that I have listened to on Bloomberg radio think that number may still be too low. We could talk about the inevitability of the slowdown in China, which has been in the news for a few months. This does affect the U.S. since aggregate demand, exports and commodity pricing are very much affected by what is going on in China as well as the other emerging market countries. This story is still playing out but the long term trend for the emerging markets is still intact.

The reason why this is important is not because I’m an economist (I’m not) or because it helps me to be a better stocks picker (it doesn’t). It helps to understand the reasoning why stocks may be moving. Stocks that move are a good thing because if they don’t move, how will you be able to buy them cheap or sell them high?

Recap of 2011

The trade for 2011 was the dividend trade. A good example of this is that boring sector, Utilities (XLU), which handily beat the market last year by 15%, over 17% if you add in dividends. That’s a big move for a sector that is primarily income oriented and low beta. How about 2012? It’s gone completely the other way so far this year, XLU is now under performing by the S&P500 index by over 16%. There was a lot of chatter about dividend stocks becoming a “crowded trade” and XLU is an example of that.

Is this confirmation that things have really turned around such that the market wants to buy high beta stocks? Judging by the market moves, I would say that it’s too early to tell. The rotation that has happened so far isn’t really that big of a move, it will take more time to see if this move sticks. There is still the issue of what happens when all the stimulus is removed as well as other policy issues such as tax policy, any changes to fiscal policy to handle long term debt as well as the aggregate growth story in the emerging markets.

How To Watch Investments

Whenever the market moves or a rotation occurs, it can present an opportunity to make great investments.

The way to make great investments is to find great investments and buy them when they are selling at a discount. Let’s assume that you have a list of investments that you would love to own, but are too expensive right now. Create a watch list of all of these investments.

Here’s a list of investments I’m watching, and would love to own:

McDonalds (MCD)
Sunoco Logistics Partners (SXL)
Utilities Spyder ETF (XLU)
Kinder Morgan Partners (KMP/KMR/KMI)
New Jersey Resources (NJR)
Plus..the stocks that are in my portfolio currently

How To Buy Them Cheaply

Good companies become good stocks when the price becomes attractive. How do you know when to buy? The way to buy these kind of stocks is to use a very simple technical analysis technique. For these kind of high quality companies, you may not get much of a window to buy them, so you need to be on the watch. Out of the list above, the one that is developing nicely into a trade is New Jersey Resources. Here’s a summary of what they do:

New Jersey Resources Corporation (NJR) is an energy services holding company providing retail and wholesale energy services to customers in states from the Gulf Coast and Mid-Continent regions to the Appalachian and Northeast regions, the West Coast and Canada. The Company operates in three business segments Natural Gas Distribution, Energy Services and Midstream Assets.

The long term results for this company speak for themselves:

  • 52 years of paying dividends.
  • 17 years of increasing the dividend.
  • Stock price increased 14 out of the last 15 years, including a >10 year streak. This is actually quite rare for a stock to be up 10 years in a row.
  • Dividend yield: 3.5%.
  • Long term consistent growth, stock is up 120% last 10 years, almost 400% last 20 years.

Look at this long term chart:

The way to use technical analysis is to find a break in the long term stock price trend using the 50 day and 200 day moving averages (EMA). Here’s what they look like on Google Finance. The RED line is the 200 day moving average, while the GREEN line is the 50 day moving average:

When I look at this chart, you can see in the past the 200 day EMA is a good time to buy into this stock. Recently, it looks like the 50 day EMA was more of a support. At today’s (Mar 22,2012) price of $44.26, we can see that the 50 day EMA has already been breached. I will look to establish a position near the 200 day EMA of $40.09. At that price, the stock would have a dividend yield of 3.8%.

Summary

Where will the markets be headed next? Who knows! Whatever happens, use the volatility to your advantage by watching closely the stocks you want to own.

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  1. March 23rd, 2012 at 10:51 | #1

    Good way to find out if the market is overheated when applied to the S&P 500 index. Keep such informative posts coming SFI!

  2. March 23rd, 2012 at 15:26 | #2

    You have some solid information SFI, thanks for sharing. Many of the stocks I have on my watch list have not cooperated so far this year, so I’m building up a nice cash position and waiting. Last year I had the volatility, but not the cash. This year I have the cash and not the volatility. Hopefully the two will eventually align.

    Have a great weekend!

  3. March 24th, 2012 at 10:36 | #3

    @MoneyCone
    MC thanks for stopping by.

  4. March 24th, 2012 at 10:42 | #4

    @The Stoic
    Stoic thanks for stopping by. When I started investing during the internet boom, I thought that the game was over when it popped. But once I got more involved, I’ve realized there’s always opportunities you just need to look for them!

    regards.

  5. March 26th, 2012 at 13:32 | #5

    Hi SFI,

    Watching stocks grow is a bit of a pain when you know you could have owned them already. As the Stoic mentioned above I hope there will be more volatility down the road and my cash will be put to use. However, very few people talk about getting paid while you wait. There is no put option market on NJR, but there is no shortage of liquidity for MCD. Lets say your target is $85. Put option with September expiration trades at $1.30. With 10 options you could pocket $1,300 in premium and if (hopefully) MCD falls to $85 you will buy it at a good price. If not – at least you got the premium.

    Do you perceive this strategy as too risky? Would you buy MCD if it falls to your pre-determined price target?

  6. March 26th, 2012 at 17:19 | #6

    CFA,

    Your strategy is a good one to buy stocks cheaper. I can’t say that I have a lot of experience here but I do know the basics.

    The return for your trade is about 1.5% or 3% annualized (1.3/85). If you want to sell this option conservatively, you would have the cash to buy the 1,000 shares sidelined. I don’t see this trade itself as risky but the return is low for your trouble. You could increase the risk by trying to simultaneously put the cash to work in some other income investment, then sell when you need to (assuming the shares were ‘put’ to you). I have a bunch of cash in the O.E preferred in my portfolio that I would have confidence in stashing the money (in fact that’s where I’m putting money now!)

    MCD @85 doesn’t even get the stock out of its bullish trend. The current 200EMA is 73 and the 50EMA is 91. So, I would look to buy initial position at 91 which would put the yield over 3%.

    Thanks for stopping by, I checked out your site.

    Regards
    sfi

  7. March 26th, 2012 at 22:39 | #7

    Thanks for checking out my blog. It probably does not have enough content to be useful as yet, but I’m hopeful it may grow into something more meaningful over time.

    Back to MCD example. If you do have the cash that is sitting idle waiting to be invested then making an extra 3% seems like a decent trade. With the starting price of $90 you could increase the premium received to $2.05 and sell 5 puts to help initiate a position. The other 5 puts can be sold at a lower strike of $80 for about $0.7. Total premium received is $1,375 which is about 1.6% over 1/2 year or 3.2% annualized. Should MCD go down you will buy 500 at $90. If it goes further down you will buy an additional 500 at $80 for an average price of $85. The point is that you were ready to buy MCD anyway and had the cash to invest. Why not make an additional $1,375 while waiting for the stock to fall? Of course if it does not fall the premium will be kept as a pure gain.

    In a mean while the cash could be earning interest somewhere, such as O.E preferred. One does not preclude the other….