Seeking Alpha
Research analyst, portfolio strategy, portfolio management, long/short equity
Profile| Send Message|
( followers)

The last few days of May has given investors a glimpse into the wacky world of bull market corrections. Friday was particularly wacky because it came on no solid news of anything. I will tell you that I absolutely hate large dips on Fridays because they ruin my weekend. The color green is so much more pleasing than the color red when we try to relax for a few days, don't you think?

That being said, if you have been following my articles, you would know how I really feel about corrections: I view every single market correction as an opportunity, not a catastrophe.

There has never been a market correction, or even a severe drop, that has not reversed itself in time. While there have been a few that have come at inopportune times for some folks, they are the tiny minority, and part of the risks that we all face. It is what keeps some folks up at night, and some folks making a "shopping list".

Remember Some Basic Portfolio Management Strategies

As individual investors, we are in charge of not only managing our portfolios, but ourselves. There are times when we all need to be reminded of our "mission statement", but first, we should also know what a big market correction could look like. I wrote this article which detailed in actual dollars how a market correction would affect our Team Alpha Retirement Portfolio.

Based on the April portfolio update, here is a quick refresher of how various corrections would affect our bottom lines in Team Alpha:

Stock#Shares4/27/2013TotValueOrig. Price
XOM10088/shr880075
JNJ10085/shr850062
T25037/shr925027
GE50022/shr1100015
BKCC60010/shr600010
AAPL20417/shr8340436
PG10077/shr770061
KO10042/shr420034
XLV20048/shr960039
WFC10038/shr380037
O20050/shr1000032
KFN60011/shr660010
NLY20016/shr320014
CSCO40021/shr840018
CVX50120/shr6000116
BMY17540/shr700032
MCD100101/shr1010086
CSX20024/shr480019
F30014/shr420013
Cash Rsvsxx3247
Tot Valuexx140737

The chart above is the portfolio in total from April. The effects of an overall correction will be shown only in the bottom line charts below.

Stock#Shares4/27/2013TotValue
Cash Rsvsxx3247
Tot Valuexx125937

This is the value after a 10% market correction.

Stock#Shares4/27/2013TotValue
Cash Rsvsxx3247
Tot Valuexx112589

This one is a 20% drop which is categorized as bear market territory.

Stock#Shares4/27/2013TotValue
Cash Rsvsxx3247
Tot Valuexx70369

This one is the "biggie". A 50% retracement, wiping out all gains and throwing the portfolio value into the red.

The first part of the dividend income seeking investor's mission statement is to keep the income flowing, and not to panic. In each of the above correction cases, the yield on cost remains exactly the same (unless a few companies cut or end dividend payments, which is very rare). Holding the mega cap, blue chip stocks, that pay us to hang on, will maintain our income stream.

If we sold out, where would we put the money to earn that income?

The second part of our "mission statement" is to buy the dips and add to the core holdings. If nothing has changed fundamentally in our core stocks, buying more shares at cheap prices will wind up defining the simple stock market mantra: buy low, sell high. In our income seeking approach, we will buy low and earn more money by increasing our dividends!

If we follow the rest of our basic "mission statements" and goals, individual investors can learn to actually embrace some of these moments, as long as their overall strategy has followed the basic rules:

  • Save as much money as you can, and then save some more.
  • Keep 5 years of cash on hand to pay all essential bills; food, shelter, clothing, health.
  • Eliminate all debt, including a mortgage.
  • Spend less than you have coming in, forever.

These basic rules go all the way back to when we began this journey. Please check out this article, which was written almost 2 years ago. Once you grasp those basics, then we can take this action during any correction phase:

  • When others are selling hand over fist, seek out the stocks you want to buy hand over fist.
  • 'Buy low, sell high' never fails.
  • There are 2 sides to every trade: those who are selling and those who are buying. In irrational times such as a market capitulation, I want to be the buyer not the seller.
  • One final word, the income derived from being a dividend income investor will barely budge. You are in better shape than you realize.

These Stocks Are On My Radar To Add Shares If They Drop

The last Team Alpha Retirement Portfolio update can be reviewed right here. Within the review, I noted a handful of stocks that I am targeting to add more shares to in my own personal portfolio as well as for Team Alpha.

General Electric (NYSE:GE), Wells Fargo (NYSE:WFC), Cisco (NASDAQ:CSCO), CSX (NYSE:CSX), and Ford (NYSE:F).

WFC is my number one target. The simple reason is that as mortgage rates rise, there will be more room for big banks to make money on mortgage lending. We all have seen the housing sector rebound nicely and more folks are buying homes again. Not everyone can get a mortgage since the rules of every bank has tightened. If mortgage rates rise, banks will have a wider spread to profit and should loosen some lending rules, but not too many to have a repeat of the 2007-2009 calamity.

WFC lends more loans for mortgages than any other bank, as I noted back in this article:

As the housing market continues to recover, both in sales as well as prices, there will be more homes sold, and as a result, more mortgage loans written.

And in this article:

WFC, in particular, is perhaps the largest beneficiary of the increased demand in mortgages, since they happen to be the largest in that business segment already. Take a look at the latest Seeking Alpha "market current" on this fact:

3:39 AM Wells Fargo is enjoying the benefits of charging forward in the mortgage market while its rivals have retreated, with the bank accounting for 28.8% of all home loans issued last year as "production" hit a record $524B. The strategy has brought massive profits, although questions are being asked about what Wells will do once the refinancing boom, which has driven its growth, drops off.

GE is number two on my list, even though I am somewhat overweight in the stock. I believe that GE has been making all the right moves, and is still my 2013 stock pick of the year for the same reasons I detailed in that article, as well as the more recent developments that GE has had:

  • The sale completion of NBC Universal much earlier than expected.
  • A more defined focus on core businesses such as oil and energy.
  • Significant reductions in the GE Capital division, even while the parent company reaps the more than $6 billion in cash dividends to be paid this year
  • Redeployment of cash into other business segments as detailed in this article:

CSX is next on my list, as I detailed within this "Editors' Pick" article. I believe that as our nation becomes energy independent, the rail systems will be an integral part of transporting oil and oil related products all over the nation, as well as to the shipping ports for exportation all over the world. CSX is perhaps the best of breed, especially on the East Coast. I wrote this:

I always believe that as one "window" closes, a few "doors" open up, and it seems clear to me that the exportation of coal, and the use of CSX to ship products, is a positive opportunity, not just a negative write off. Let me stress that exportation is not the only way for CSX to grow. Keep in mind that the rail systems bring products of need to every part of our nation as well. As a matter of fact, more housing products, such as lumber, is shipped via rail (CSX being one of the largest) to just about every corner of this country. As the housing recovery continues to improve, more products will be transported.

Finally, I happen to believe that many areas of technology will benefit, and one company that I now consider an important dividend, or value, stock is CSCO. With their consistent income stream and recent dividend focus, adding shares of this stock makes "dividend sense" to me.

The same goes for Ford. As the economy heals, employment gets better and income rises, Ford is positioned very well in the main stream low to mid priced auto sector. In addition, the company has given the Lincoln division a face-lift with some beautiful cars. The pricing is below Cadillac and other luxury models, so the potential for increased sales in that division gives Ford an even more complete look.

The Bottom Line

I have my shopping list ready, and am looking forward to some red-tag sale days to pick up some cheap shares in the stocks I noted above. Every investor has a different list, but I hope they have a list to help their portfolios, not hurt them.

Income is our focus, and adding more shares at bargain prices will potentially give us a raise in income, even as the markets correct.

Disclaimer: The opinions offered by the author in this article are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.

Disclosure: I am long CSCO, CSX, F, GE, WFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Embrace Corrections As Opportunities, Not Catastrophes