Nine Quality Stocks for a Market Bottom

Equity markets could be in the region of a short term, if not an ultimate, bottom, says Canaccord Adams market strategist Nick Majendie. And if that is the case, it will be the quality Blue Chip stocks that recover the fastest.

Mr. Majendie argues in a note to clients that there are positive signs that some sort of bottom is forming. His reasoning is that there have been 12 occasions since 1900 when the Dow Jones index has been down more than 40%, and in 11 of those periods, the drop stopped somewhere between 40% and 50%. The only exception was in the deflationary era of the early 1930s, when the Dow Jones index fell 89%. “Thus, unless we are into a deflationary period, the decline should stop in this general area or close to it,” he says.

Will deflation be a factor this time? Well, Mr. Majendie says, not if the U.S. Federal Reserve can help it, pointing to the central bank’s recent intervention. He says that last week, the adjusted Monetary Base, which is directly impacted by the Fed’s open market operations, was up 38% year over year, having been increasing at only a 2% to 3% pace the preceding year. That 38% figure is the largest increase in the history of the Fed so far, he says, comparable only to the 28% surge during the recession of 1937. “When the [equity] market turned then, it was up 50% in just over six months.”

Mr. Majendie says that when a recovery does occur, Blue Chip stocks will bounce back first because “whenever there is financial panic, investors sell the good with the bad.” He adds with all the recent de-leveraging by financial institutions and in particular, hedge funds, “the margin clerk has been king.” Whatever stock could catch a bid is often the first sold off, so even Blue Chip stocks have traded down to Depression-type valuations.

With this kind of optimism, Mr. Majendie’s report highlights 10 “quality” stocks that might provide some opportunity for nimble investors. They include: Barrick Gold Corp. (ABX), Bank of Nova Scotia (BNS), Goldcorp Inc. (GG), Manulife Financial Corporation (MFC), Nexen Inc. (NXY), Potash Corp. (POT), SNC-Lavalin Inc., Teck Cominco Inc. (TCK), Suncor Energy Inc. (SU) and Thomson Reuters Corp. (TRI).

“They are all what we would regard as strong companies and are selling at historically very cheap multiples,” Mr. Majendie says. For example, Barrick Gold and Thomson Reuters are selling at 60% of "normal" cash flow multiples of the past 5-10 years, while Nexen is trading at half of its historical cash flow multiple, assuming US$70-a-barrel oil, US$6 NYMEX gas and a Canadian dollar worth US85¢.

"Quality stocks with strong balance sheets, good and sustainable dividends, and good long-term growth prospects should be the first to recover," says Mr. Majendie.

Comments

[Rumpole:]

In terms of the adjusted monetary base, the U.S. Treasury / Fed has a lot more money to print to fill the debt vortex created over the last number of years. So the cited 38% growth rate even when compared with the 30s era 28% rate might not be so indicative of eventual market elevation.

2008 Oct 31 09:52 PM

[Deltaxray7:]

Well lets not forget the nationalization of 401Ks that will take place
in the spring of 2009.

According to the Raleigh Journal, Democrats in congress
are investigating ways to confiscate 401Ks and put the money
into the social security administration funds.

If this occurs as I suspect it will, stocks won't be worth the paper
they're printed on.

2008 Nov 10 11:54 AM