I recently published an article in which I detailed why I am very cautious on the market and believe we are long overdue for a significant correction. There are a variety of triggers that could initiate this selloff: The continuing deterioration of the European debt situation; the end of QE2; the unfolding unrest in the Middle East and North Africa; our intractable deficit and congressional fecklessness; rising inflation throughout the world; and numerous other geopolitical and domestic challenges.
Obviously, putting your entire portfolio in cash is not a prudent approach while awaiting a significant pullback. I believe one of the few areas of the market that have not run up past reasonable valuations are large cap, well-run blue chip stocks that get a good portion of their sales and earnings from faster growing international and emerging markets. They also should have a decent and growing dividend yield.
Here are five that meet these criteria and might be worth taking a look at. I would also look at the possibility of using these stocks in a buy/write strategy using just out-of-the-money Jan. 2012 calls.
Microsoft (MSFT) is selling at nine times this year’s earnings after backing out net cash. It has increasing earnings estimates over the past 90 days for both this year and next year. The company is benefiting as it is early in the upgrade cycle for Windows 7 and Office 2010. MSFT is also getting good traction in gaining market share in the search market with Bing; the X Box platform continues to grow in popularity; and it's just starting to focus on the growth area of cloud computing. It has a dividend yield of 2.5%.
Exxon (XOM) is the largest and arguably best-run publicly-held oil company in the world. It sells at less 11 times this year’s earnings and less than 10 times consensus earnings for next year. Earnings estimates for both years have risen sharply for both years over the last 90 days. The acquisition of XTO Energy also helped diversify its energy holdings and gave it another source of energy production capacity in a safe area of the world. It yields 2.1%.
Abbott Labs (ABT) is a well-diversified healthcare product company. It is selling at 11 times this year’s earnings and 10 times next year’s earnings. It yields a generous 3.8%. It has a large stable of patent-protected drugs, has a solid research and development history, and has had success in acquiring companies to fill out its portfolio.
Walmart (WMT) is the largest retailer in the world. It sells at 12 times 2011 earnings and 11 times 2012 earnings estimates. It yields 2.8%. It has one of the best logistic systems in the world, is rapidly expanding overseas, and should benefit if inflation and slow job growth drives consumers down market.
JP Morgan (JPM) is widely acknowledged at one of the best-run banks in the country. It came out of the financial crisis of 2008 bigger than it went in, as it made several acquisitions at fire sale prices. It only yields 2.1%, but this should increase rapidly in the future as it sheds it regulatory shackles.
It is selling at 10 times this year’s earnings and less than nine times consensus earnings for next year. It has significantly beaten earnings estimates over the last four quarters and consensus earnings estimates have also increased significantly over the last 90 days. Although JPM does not get much revenue or earnings from overseas, I believe its domestic prospects are solid, given one of the best balance sheets and managements in the industry.
Disclosure: I am long MSFT, XOM.