Like many speculators these days, I'm waiting for a market correction in what looks like an overbought market. At the same time I'm looking for defensive stocks and for opportunities to generate income by writing covered calls on the stocks that I might buy. So a column, What to buy as the market tops, Commentary: Is it time to bring back the blue chips?, by Mark Hulbert, caught my eye today. Hulbert writes for MarketWatch.com and has been writing advisory letters since 1980.
Rather than watch the Broncos, I've spent more than three hours researching Hulbert's defensive investment ideas for this overbought market. I found two almost buys (PPL Corporation (PPL) and Wal-Mart (NYSE:WMT)), a hold (my Altria Group, Inc. (MO)), and four stocks and an ETF that I won't even consider (Archer Daniels Midland (ADM), Baxter (NYSE:BAX), iShares Select Dividend ETF (DVY), FirstEnergy (FE) and Kellogg (NYSE:K)). (Actually, the ideas came from a source Hulbert quotes in his column.)
First, I put the 'Hulbert's defensives' into watch portfolios on SeekingAlpha.com, Morningstar.com and StockCharts.com so I could look at their ratings, fundamentals and technicals. Then I checked out their ratings and dividend cushions on Valuentum.com. Finally, I read some analysts' reports.
What I found is that ADM, DVY, K, MO and WMT are overbought or too close to it for my comfort in this market. On point and figure charts, ADM and DVY are breaking out while PPL and WMT are below their point and figure price objectives. PNF price objectives are met some 70% of the time. Some are beat as with MO and some are undershot one way or the other.
BAX, FE, K and MO are above their PNF price objectives.
ADM, DVY, K, MO, and WMT are above Morningstar's estimated fair values for those stocks.
For example, the one stock that looks mildly attractive at this point, WMT, is trading at $77.96. It's point and figure price objective (not target) is $91. But M* estimates its fair value based on discounted cash flow analysis at only $74, while Valuentum's FV estimate is $77 with a range of $62-$92
Three stocks (BAX, MO, WMT) have healthy Valuentum dividend cushions. That means their dividends are safe and likely to grow given their current and anticipated balance sheets. ADM, FE, K and PPL have dividend cushions of less than 1, which means their dividends aren't very secure and have no room for growth. Smart dividend investors buy stocks of companies that sport safe dividends and the potential to grow them. Dividend history is not a good indicator of the health of a company's dividend, according to Valuentum.
If you're looking to buy a stock that is already down so much from its 52-week high that it probably will stabilize soon regardless of what the general market does, BAX is trading at 87.4% of its 52-week high, FE 83%, K 91.5%, PPL 90.9%.
For income- and security-minded covered call traders, the news is bleak. Using the rule of thumb that you write covered calls only on stocks with high implied volatility and stocks that have wide spreads between implied and historical volatility, I wouldn't write covered calls on any of issues on Hulbert's list.
Lesson learned: After you read about a speculator's strategy, do your own research. You might come to a different conclusion.
Note: I am not an investment advisor, counselor nor professional, and I am not responsible for how others trade after reading my blog posts. I own MO, which is a hold for me at this time.
Disclosure: I am long MO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.