2016's First 4 Days, Upside And Downside. So What To Do Now? 2 Favorites And 6 Bottom-Fishing Candidates

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Includes: BRK.A, BRK.B, CHL, CVX, FXI, MKL, RDS.A, VWO, XOM
by: Tim Butler

Summary

Comments on 2016’s first 4 trading days.

Setting an expected range for 2016 downside and upside.

2 favorite investment candidates for 2016 at today’s prices.

6 bottom-fishing candidates, where there is blood in the streets.

2016's First 4 Days

In the first 4 trading days of 2016, the market is down ~900 DJI and 100 S&P 500 points, both roughly down 5%, due to the China rout and oil at ~$33 per barrel. These dark, cold, cloudy, scary, short term, dramatic, emotional noise, headlines - including the alleged North Korean H bomb - are not a major 2016 worry, unless these early days are a harbinger of a global recession coming in 2016. If Q4 earnings season delivers expected decent to good news starting next week, and China and oil calm down, we could have a nice rally in January 2016. Imagine that!

2016 Downside and Upside Range Estimates

If this four-day market rout is a harbinger of a 2016 recession, then there is a lot more downside to come - S&P 500 at 1500 is a 2016 possibility. So let's take a look at and assess the downside.

  • Let's start with 3 scenarios for 2016: Recession, No Growth, and Growth.
  • Use corresponding 2016 S&P 500 EPS estimates at $100, $115 and $123.
  • Apply a S&P 500 2016 normal mean multiple at 15x, projecting the 2016 S&P 500 for the 3 scenarios at 1500, 1725, and 1845.
  • This suggests 2016 downside potential from the Jan 7th close for the 3 scenarios at -23%, -11%, and -5%.
  • With the downside for all of 2016 at -28%, -16%, and -10%.
  • And with the January 7th close for the S&P 500 multiples for the 3 scenarios at 19.4x, 16.9x, and 15.8x.

So current S&P 500 multiples, based on the 3 S&P 500 '16 EPS scenarios, are still above the long-term mean of 15x, but 9% lower than last year's S&P 500 high at 2135. The multiple has come down, and the market appears more reasonably valued than in May 2015.

What about the upside for 2016? By applying a 2016 S&P 500 projected upside limit of 2,250 based on consensus upside views, then the 2016 upside from the Jan. 7th close is 16% (2250/1943) and 11% for all of 2016. 16% upside from now sounds pretty nice, and not completely unfeasible.

So the S&P 500 could fall 23% further in 2016 to 1500 or it could rise 16% in 2016 from now to 2250. Projecting a possible range for the S&P 500 in 2016 is interesting, but it doesn't help you in considering what to do with your portfolio decisions.

2 Favorite Investment Candidates At Today's Prices

Warren and Charlie have consistently said they pay scant attention to macroeconomic trends, nor outlooks. Instead, they buy stocks they like based on favorable business economics and attractive ROEs, quality trustworthy management, and a purchase price that reflects a "margin of safety" and therein has attractive long run capital appreciation upside.

So what about your stock portfolio today and tomorrow; should you be doing anything?

When I reviewed my stock portfolio holdings along with those client portfolios which I manage, I can tell you that I did a tad of selling on Monday morning, January 4th, but have done no selling since.

Among stocks I own or manage for clients, my favorite stocks at the moment at today's prices are Berkshire Hathaway A (NYSE:BRK.A) and Berkshire B (NYSE:BRK.B) and Markel (NYSE:MKL). I'd like BRK.A better at $190,000 and MKL better below $800, both of which were touched in Q4 2015. However, both are very attractive at today's prices.

Berkshire now at 1.3x book value, with Mr. Buffett's buyback policy at 1.2x book value, is a genuine bargain and great long-term investment candidate. Markel's consistent, long run, 20-year historical and 2015 outperformance makes it a solid investment candidate for the future, and it's the best of the baby Berkshires.

6 Bottom-Fishing Candidates

If the contrarian in you finds bottom fishing at today's prices to be appealing, then you may want to consider dipping your toes in the dark murky waters by speculating to investing with a tiny amount in high quality oil stocks, China and emerging markets. In these three areas, there is clearly "blood in the streets" now, and it can pay off in the longer term to "be greedy when others are fearful" according to Mr. Buffett.

By tiny amount, I suggest considering a commitment of only an eighth to a twelfth now, of what you might consider to be a reasonable long run purchase investment commitment to these three areas - oil stocks, China and emerging markets. Then re-evaluating further investment commitments of an eighth to a twelfth of your target commitment on a quarterly basis going forward.

Here are the 6 bottom-fishing investment candidates to consider:

  • Exxon (NYSE:XOM) at $76, down 17% from its 52-week high of $93 yielding 3.75%.

  • Chevron (NYSE:CVX) at $83, down 26% from its 52-week high of $113 yielding 4.7%.

  • Shell (NYSE:RDS.A) at $42, down 33% from its 52-week high of $67 yielding 4.5%.

  • iShares China Large Cap Fund (NYSEARCA:FXI) at $32, down 38% from its 52-week high of $52 yielding 2.1%.

  • China Mobile (NYSE:CHL) at $51, down 32% from its 52-week high of $75 yielding 3.5%.

  • Vanguard FTSE Emerging Markets Index ETF (NYSEARCA:VWO) at $30, down 33% from its 52-week high of $45 yielding 3.2%.

It's a speculation to think these candidates may move up in price in the short term, or even over the next couple of years. However, it's an investment if you are thinking about a time frame of three, five or ten years from now, when all of these issues will likely be substantially higher.

As of the January 7th market close, I have not yet added to my Berkshire nor Markel holdings. However, I did buy a tad of all 6 bottom-fishing candidates. We will see how that turns out in the years to come.

This is not investment advice. Instead it's commentary on the future prospects for the stock market. Do your own research and make your own decisions.

Disclosure: I am/we are long BRK.A, BRK.A, MKL, XOM, CVX, RDS.A, FXI, CHL, VWO.

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.