It has been a rocky start to the second half of the year in trading in the market. As I noted yesterday, there are increasing warnings signs from Europe that their credit situation is not nearly as good as is believed by most of the market. That call looks somewhat prescient, as equities are being rocked today by worries that the Portuguese banking system could be under distress.
As I have been saying for some time now on Seeking Alpha and Real Money Pro, I believe discretion is the better part of valor right now in the market. I have a much higher allocation in cash than usual. I have been tilting my portfolio more towards blue chip large caps and selling covered calls on my remaining small cap positions to lower volatility and risk on my portfolio. Large caps have lower betas and more reasonable valuations.
Most importantly, I am prepared, should we get a decent pullback. I have formulated a "shopping list" to add to positions if the market does offer lower entry points. Here are a few of those names on that list right now.
I would not mind adding to my stake in Boeing (NYSE:BA) at $5 to $10 a share lower than the current price level. The company is winning the battle with Airbus on being the preeminent airplane manufacturer in the world. This recently was demonstrated by it winning a better-than-$55 billion contract from Dubai's Emirates. That contract was previously cancelled with Airbus.
The company is also well-positioned to benefit from the secular and increasing demand from the developing world, including China and India. The company came out this morning and stated plane demand would lift substantially over the next two decades. It expects some 37,000 large planes to be needed and delivered through 2033, worth some $5.2 trillion. Expect Boeing to capture the lion's share of that demand.
In addition to robust demand over the next couple of decades, the company is an American manufacturing icon with a strong balance sheet, and pays a 2.2% dividend yield to boot. Consensus earnings estimates for FY2014 and FY2015 have been moving incrementally up over the past three months, and the stock trades roughly in line with the overall market multiple on a forward PE basis.
I also like Celgene (NASDAQ:CELG) for this environment, as any global economic hiccups are unlikely to impact in any large degree its drug sales. The company also has the deepest pipeline in the industry. The stock even managed to go up over 2% yesterday, even after it announced disappointing results from Phase III trials for a compound to treat arthritis.
Earnings are tracking to a 20% to 25% year-over-year gain this year on the back of a better-than-15% increase in revenues. Analysts believe growth will accelerate next year. Consensus currently is calling for a 25% to 30% pop in earnings in 2015, with revenues increasing more than 20%. The stock is not expensive, given growth prospects at 18 projected FY2015's earnings. I would love to see stock drop 5% to add to the position.
Finally, I added to upstream energy partnership Memorial Production Partners (NASDAQ:MEMP) this morning. The shares started the day down more than 7% on a just-announced secondary. This is the standard form of capital raises for this type of entity.
Memorial has done 3-4 of these secondaries since I have owned the shares. The stock always drops 3% to 7% on the day of the secondary. 4-6 weeks later, MEMP is back to its pre-secondary price level. I keep a core position in the company and then trade around the secondary, buying the dip and then selling the additional shares when it reaches equilibrium a month or two after the event.
The shares provide a robust distribution yield of ~9.5% after the secondary. Earnings are tracking to a better-than-40% year-over-year gain on an over-50% increase in revenues this year. Given the yield and growth, the entity is not expensive at 11.5 times forward earnings.
Hopefully we get a nice pullback, so I can add to most of the names on my shopping list. That is my game plan for the moment. It should be an interesting summer in the market.
Disclosure: The author is long BA, CELG, MEMP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.