What Others Are Buying on Weakness

by: Matthew Rafat

For those of you looking to tip-toe back into the market, looking at money flows is one way of seeing what others are buying. On December 18, 2008, it appeared investors were buying the following companies: Cisco (NASDAQ:CSCO); Intel (NASDAQ:INTC); Coca-Cola (NYSE:KO); and Wells Fargo (NYSE:WFC). Investors might also consider adding a Brazilian ETF (NYSEARCA:EWZ) and an undervalued technology company, Maxim Integrated Products (NASDAQ:MXIM), to the above list.

The Dollar's recent decline favors American companies that receive a substantial portion of their revenues abroad. Although one of my colleagues thinks Coca-Cola is sugar water and refuses to buy the stock, Coke has a decent dividend; good cash flow; and worldwide appeal. Even if a large percentage of the entire world becomes unemployed, they still have to drink something, and coffee--especially at 4 dollars a cup--is losing its status as the drink-du-jour. I also find it unlikely that people will cut back on soda, because soda is still cheaper than most other drinks.

Cisco is poised to rebound as an infrastructure play, especially if it gains ground in China and other Asian countries. Cisco has taken various actions--which include providing support after the Sichuan Province earthquake--to convince the Chinese government it wants to be a technology leader in China.

Wells Fargo (WFC) represents a risky contrarian play. When the real estate market recovers--which it will, at some point--Wells Fargo will benefit. If it maintains its dividend, investors will receive around 4% while they wait, a better rate than most CDs. I considered replacing Wells Fargo with an REIT, but I used to own REITs primarily for their dividends. At this time, Wells Fargo's dividend is high enough for me to prefer its diversified business over a REIT. I also like the fact that Warren Buffett owns Wells Fargo shares.

EWZ is a Brazilian ETF. I've included it here primarily for diversification purposes, especially in the energy / commodities sector. Some investors may prefer to buy ConocoPhillips (NYSE:COP), another Buffett pick, instead.

Intel (INTC) was downgraded by Jefferies and Co.Thursday. (Interestingly, Jefferies (JEF) itself is being sold short by Barry Ritholtz, who accurately predicted the most recent market downturn.) With a 3.6% dividend yield, a dominant market position, and around $10 billion of net cash, it's hard to see Intel stock remaining at current levels. Although the U.S. market is saturated, Asian consumers will be buying more computers, and businesses worldwide will be buying more servers--products which generally require or use Intel CPUs, due to Intel's quasi-monopoly position in the processor market.

Intel's real problem is that lower-end laptops have become so cheap, they retail for about the same price as a Blackberry, iPhone, Google (NASDAQ:GOOG) Android phone, and Sony (NYSE:SNE) Playstation. As a result, if consumers choose to delay upgrading their laptops and instead buy an iPhone or a video game console, Intel's revenue will suffer.

Maxim Integrated Products (MXIM) has no debt and finally appears to have its financial house in order, having resolved stock option backdating issues. Now that its external issues have been resolved, Maxim should do well as more consumers worldwide buy products using Maxim's analog chips. Maxim sports a 6% dividend yield.

Disclosure: I own shares in all of the companies mentioned above. My relatives also have other financial interests, including shares, in Maxim Integrated Products (MXIM). You can read about Maxim's recent shareholder meeting here.