What's Safe To Buy Here - Part I

Includes: AEG, BP
by: Bret Jensen

"As we sail thru life, don't avoid rough waters, sail on because calm waters won't make a skillful sailor" - Anonymous

The start of the investing year has been rocky. Mainly due to accelerating turmoil in the emerging markets and unknowns around the true impacts to the Federal Reserve's initiating of the "taper"; equities posted their most dismal monthly performance since May 2012 to start the New Year.

I believe this could continue for some time while investors wait to see some stability from emerging markets and become more confident that the liquidity being withdrawn from the markets by the Federal Reserve will not derail accelerating domestic economic growth.

I also think equities need some more time to digest and consolidate their ~30% returns in 2013 which were attained even though S&P earnings only rose ~5% during the year.

It pays to be cautious here in my opinion. In my portfolio, I have the highest amount of "dry powder" accumulated since before the financial crisis. I am nibbling on market pull backs. These new allocations are going to boring equities with solid dividend yields, cheap valuations and sentiment that is already negative and unlikely to get worse regardless of what the market does.

During the week I will cover numerous of these types of "safe" stocks. In order to preserve conciseness I will break this up into several articles. With that, let's take a look at a couple of unloved equities that offer good value here.

I continue to positive on Netherlands based insurer AEGON N.V. (NYSE:AEG) even though it is up ~15% since the last time I profiled it in early November. The company is a leading international insurance group that primarily offers life insurance, pension, savings and investment products.

The company gets priced at a "European" discount given its headquarters but the insurer actually gets over 70% of its revenue from more stable and faster growing North America. Even with the stock's recent rise, AEG is cheap at less than 60% of book value. A good way to think of this insurer's long term value is to think about where our banks & financial stocks were in 2010 as Europe's recovery is several years behind ours.

The shares yield just under three percent (2.9%) and dividend payouts should increase significantly over the next couple of years as the company continues to emerge from Europe's debt crisis. Earnings should increase some 20% year over year in FY2014 and consensus earnings estimates for 2014 have gone up some 10% since my previous article highlighted the shares. The stock is selling for under 9x this year's expected EPS.

It is hard to imagine how the next five years could possibly not be brighter than the last half decade for BP plc. (NYSE:BP), formerly known as British Petroleum. In addition to navigating through the financial crisis, the company became a corporate pariah and piñata for various regulators, plaintiff attorneys and politicians after the disastrous Macondo blowout in the Gulf in 2010.

BP has spent the last couple of years selling off a myriad of non-core assets and paying tens of billions in claims, fines and settlements to various entities. The good news is the company is mostly through this brutal gauntlet and should start to be valued as a normal energy concern in the years ahead.

On that note, BP offers several attractive features at these levels. First, the shares provide an almost five percent yield (4.9%) at current levels. Earnings growth should return in 2014 after showing a decline in 2013. The consensus estimate has earnings increasing some 15% in FY2014 and shares offer an attractive value of ~8.5x this year's earnings estimates in addition to a high yield.

Both of these unloved yield plays are in my income portfolio. In addition, I will not be hesitant to add to my positions in these value plays if the market continues to decline.

Disclosure: I am long AEG, BP. 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.