A recent Barrons.com article sums up the current investment climate by reminding us about how Warren Buffett invests:
Everyone likes to quote Warren Buffett. He's rich. He plays bridge with Microsoft (MSFT) founder Bill Gates, who is even richer. And he has simple, solid ideas about investing. He buys good stocks. Forever is his favorite holding period. Buy fear.
We recently saw what happened when fear and emotions trumped fundamentals with Bank of America (BAC) stock. Many investors were scared out of their shares for about $6 per share and then Buffett bought that fear with an investment of about $5 billion into BofA. This causes BofA stock to jump about 25% in a very short time frame. There is no doubt that many other stocks are trading on fear in this market more than on their fundamentals or future growth potential. Here are some stocks that could provide very strong long term rewards for investors willing to buy the fear right now.
General Motors (GM) shares are trading at $23.58. GM is a leading automaker. The 50-day moving average is $27.62. Earnings estimates for GM are just over $4.27 per share in 2011 and $4.77 for 2012 so the PE ratio is only about 5. Two officers recently bought over 5,000 shares. The fear for some investors is that the U.S. and the global economy are about to fall into another major recession. A significant global economic downturn would impact GM, but the stock seems to be pricing in a lot of bad news and fear already with it trading for about 5 times earnings.
United Continental Holdings Inc. (UAL) shares are trading at $18.75. United is a major global airline. The 50-day moving average is $19.85 and the 200-day moving average is $23.36. UAL is estimated to earn about $3.57 per share in 2011 and $4.98 in 2012. This puts the PE ratio at just over 5. Book value is listed at $5.80 per share. A global depression would lower air travel significantly, but a recession would probably not be that bad since a lot of air travel is essential to see family, move, and conduct business, so the sell off seems overdone here. Oil prices have been dropping and that is a huge plus for lowering the fuel costs of this major airline. A recession will lower fuel costs even more and that will act as a counter balance if revenues come in lower.
Barclays PLC (BCS) shares are trading at $10.82. Barclays is a leading banking and financial services company based in the United Kingdom. The 50-day moving average is $13.61 and the 200-day moving average is $17.06. The 52-week range for these shares is $9.53 to $21.69. Earnings estimates for BCS are about $2.40 per share for next year, so the PE ratio is about 5. BCS pays a dividend of 65 cents per share, which is equivalent to a 3.3% yield. The book value is stated at $28.15. Bank stocks have been one of the most feared, especially banks based in Europe due to the debt crisis. Based on earnings and book value this stock looks very oversold. These shares are trading at a low PE ratio and earnings are expected to grow.
Ashford Hospitality Trust (AHT) is trading around $8.02. Ashford is a real estate investment trust company, based in Texas. These shares have traded in a range between $6.80 to $14.32 in the last 52 weeks. The 50-day moving average is $10.55 and the 200-day moving average is $10.70. AHT is estimated to earn about $1.97 per share in 2011 and $2.06 for 2012. The book value is stated at $13. This REIT focuses on hotels and investors are concerned that a recession will reduce hotel revenues and impact AHT. The stock has come down from about $12, so unless there is a major recession things might not get much worse here. The dividend payout is 40 cents per share which is equivalent to a 5.2% yield.
Allstate (ALL) shares are trading at $26.04. Allstate is a leading insurance company based in Illinois. The 50-day moving average is $27.52 and the 200-day moving average is $30.11. Earnings estimates for ALL are about $1.40 per share in 2011 and $3.70 for 2012 so the PE ratio is about 9. ALL pays a dividend of 84 cents per share, which is equivalent to a 3.4% yield. The book value is stated at $35.68. Insurance companies have had a tough year with many natural disasters leading to higher claims. However, even in a recession, insurance is always needed and Allstate can raise rates sooner or later. These shares are trading at a low PE ratio and earnings are expected to grow.Disclosure: I am long UAL, BAC.