Playing Defense As The Markets Rotate

Includes: AAPL, ALL, T
by: Bret Jensen


Momentum names are getting hit hard in trading Monday.

A rotation seems to be underway as investors gravitate to more stable quality names with reasonable valuations.

Below are three quality stocks with solid valuations and decent dividends. They look ready to outperform in a more volatile market.

The market indices are not showing some of the carnage going on beneath the surface in midday trading. Biotechs are continuing their deep declines after Friday's sell-off which was the worst one day performance in some two years in the sector.

Momentum names like Netflix (NASDAQ:NFLX), Splunk (NASDAQ:SPLK) and Tesla Motors (NASDAQ:TSLA) are also getting hammered as are gold miners, which had been one of the strongest performing sectors of the market so far in 2014.

It looks like a huge rotation going on as high quality value names that pay decent dividends and sell at reasonable valuations are doing well, most are even booking gains at midday Monday.

As I have stated recently, the markets appear ready to crack after the huge rally of 2013 and as the Federal Reserve continues to withdraw the amount of liquidity it is providing the market. I think we are in the early innings of this rotation and have been allocating the bulk of my portfolio to stocks like the ones that are doing well today.

Stable earnings profiles, solid valuations and growing dividends are good criteria for stock selection here in my opinion. Here are three of these quality names I hold and like here regardless of what is going on in the larger market.

Allstate (NYSE:ALL), the second largest domestic personal insurer looks like a good value here. The company just boosted its dividend by 12% and now yields 2% annually. The shares go for less than 10x trailing earnings. The company does not get much credit in the investment community for its ability to deliver results as Allstate has badly beat the consensus during each of its last three quarterly reports.

The company is growing revenues in the 4% to 6% annual range which is in line with the projected sales growth in the S&P 500 for 2014. However, the stock sells a third less than overall market multiple. In addition, the five year projected PEG (1.15) is solid for this high quality value name.

Apple (NASDAQ:AAPL) has been stuck in a narrow trading range over the past three months after previously posting a big move over the past six months of 2013. It feels like it is consolidating here before moving higher in the second half of 2014.

Long desired larger screens should be a part of the iPhone 6 which should launch by the end of the year and be announced by summer. Something in the wearable technology space or some sort of streaming TV service also seems plausible in the near future.

The shares are cheap taking into account the company has over $150B in net cash & marketable securities on the balance sheet. Removing that net cash and the stock is priced at approximately 8.5x this year's expected earnings. The company has also shown it will be a big buyer of its own stock at around the $500 where it spent over $10B after the stock fell after its last earnings report. The shares yield 2.3% and investors should get another dividend boost announced by the end of the year.

I recently purchased some AT&T (NYSE:T) for the first time in years when it skidded to $32 a share. The stock has behaved well since then but is still down more than five percent from its highs late in 2013. AT&T yields 5.4%.

The stock also is reasonable valued at ~13x projected 2014 EPS. Concerns about a price war seem overblown and I don't believe the company will pay a premium and acquire Vodafone (NASDAQ:VOD) as has been rumored. Free cash flow should improve in 2015 as the company completes most of its huge 4G network build out this year.

The selections above are not the most exciting names in the stock universe. However, they have low betas, reasonable valuations and decent dividends. If equities do hit more turbulence they should easily outperform the overall market. "Keep in simple, Keep it safe" still feels like the right strategy for this market.

Disclosure: I am long AAPL, ALL, T. 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.