Safe Harbor Equities In A Spooky Market

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Includes: AAPL, GILD, HD, JWN, LOW
by: Tim Harrison

Summary

The "doomsday" sentiment in the market is overstated.

Several positive catalyst exist, including improvement in the U.S. economy, earnings, housing and the labor market.

These five stocks offer investors relatively "safe" opportunities.

The S&P 500 and Nasdaq experienced its worst weekly performance in more than two years. The S&P was down over 3.5% for the week, while the Nasdaq was off over 4.7%. Over the last 30 days, the S&P has slipped almost 4.6% and the Nasdaq has dropped just under 6.8%. As of this writing, both indexes are off around 1%, but have not capitulated. This shift in market sentiment has seen volatility, as measured by the VIX (^VIX) exploding upward 65% in the last month and 48% just this past week, settling at 21.24 on Friday, near two-year highs. In short, things have gotten pretty ugly out there. Investors are worried about a confluence of problems; the impending end of Federal Reserve stimulus, as well as weak growth overseas, especially in the eurozone and China, and its potential effect on U.S. earnings. The slide in oil prices has also served as an omen for poor demand, an indication of slowing economies worldwide.

Obviously, nobody knows for certain where we are headed, but I believe this market drop is temporary. The markets are off about five percent, half of what most market watchers would consider as a true correction. The S&P 500 closed just at its 200-day SMA of 1905. This is crucial support, and the markets will be watching closely to see if the index capitulates and breaks through this support next week.

I believe the current negative sentiment driving the market is overstated. There are several factors that support a bullish case. Though the latest housing numbers were slightly down in September, this was preceded by four straight months of increases. According to the National Association of Realtors, existing home sales are projected to decline for 2014, but should trend up to more than 5.2 million in 2015. In addition, pundits have been arguing that home sales and overall improvement in the economy are heavily contingent upon job growth and falling unemployment. Numbers released on October 3rd by the U.S. Bureau of Labor Statistics revealed that non-farm payroll employment increased by 248,000 in September, compared to an average monthly gain of 213,000 over the prior 12 months, and the unemployment rate declined to 5.9 percent, the lowest since 2008.

With an improving economy, coupled with the impending Q3 earnings announcements, which are expected to be up 1.6% from the same period last year on 1.7% higher revenues and modest margin gains, I believe the market will rebound in the coming weeks/months. Even if we experience a full-blown correction, this implies only a 4%-5% additional drop in the markets.

Though the carnage has been widespread and few companies or sectors have been spared, there have been a handful of stocks that have held up very well over the last week and month, with either relatively modest declines or even slight gains. In this article, I will suggest a few investment ideas that may work in this very uncertain market. I believe these stocks will continue to weather this storm, and will appreciate nicely when the market turns around.

Retail

I predict that retail stocks will do well in the coming months. Even though consumer confidence, as measured by The Conference Board's Consumer Confidence Index, declined from 93 in August to 86 in September, it is still quite robust. An improving economy and brighter jobs picture bodes well for the retail sector. Additionally, gasoline prices have been in a downtrend over the last several months, with many areas seeing prices below three dollars a gallon. According to the U.S. Energy Information Administration, gas prices on the East Coast have declined from a peak in July of $3.74 a gallon to $3.39 a gallon as of 10/6/14. This represents a 10% decline over the last three months. Anecdotally, in the metro NYC where I live, gas prices are as low as $2.85 a gallon for regular unleaded. Lower gas prices represent a huge savings to consumers, and coupled with the upcoming holiday season, bodes well for the retail industry. Finally, hiring in retail is on the rise. For September, the industry added over 35,000 new jobs, and has seen jobs grow by 264,000 over the last twelve months. Obviously, retailers are anticipating a busy holiday season and strong sales.

Nordstrom (NYSE:JWN), often considered the flagship of upscale department stores, has held up well in the recent market downturn. For the month, the company's stock is up 1.5%, and was down only .34% over this past bloody week. Shares are sitting comfortably above the 50-, 100- and 200-day SMA. The stock is reasonably valued at roughly 18 times trailing earnings, compared to an industry average of 98. The company enjoys healthy net margins of 5.6% versus an industry average of .5%, and a return on equity of 35% compared to the industry average of 1.2%. With analysts predicting earnings to grow at about 10% a year for the next five years, I expect the stock to keep appreciating at a slow and steady rate, while paying shareholders a modest dividend of approximately 2%. My one-year price target for Nordstrom is $80. More importantly, I expect Nordstrom to outperform during the ongoing market turmoil.

Another attractive sector of retail is the home improvement business. Not only is the housing market improving, but taking a closer look at the latest employment figures reveals that construction hiring is quite strong. In September, construction employment continued on an upward trend, adding 16,000 jobs, and employment in residential building increased by 6,000. Over the past 12 months, the economy has added 230,000 construction jobs. This is a good sign for both Home Depot (NYSE:HD) and Lowe's (NYSE:LOW).

According to IBISWorld, Home Depot controls 54.5% of the U.S. home improvement market. Home Depot's stock has gained over 4% over the last month, and declined only 1.5% during this past week's bloodbath. Home Depot is projected to grow earnings by 25% this year, and 16% a year over the next five years. The shares sport a one-year PEG of .9 and a five-year PEG of 1.33, and are in a strong uptrend and significantly above major levels of support.

Lowe's controls 35.8% of the home improvement market, and the company is expected to grow earnings this year by 26% and 17% a year for the next five years. Lowe's shares have a one-year PEG of .85 and a five-year PEG of 1.3. The stock is also in a strong uptrend, and trades significantly above major levels of support. Both companies also pay a modest dividend. With an improving economy, housing market and construction hiring, as well as a retail-friendly climate, I believe that the market will continue to reward these industry leaders a premium P/E, and I have a six-month price target for Home Depot of $100 and $60 for Lowe's.

Apple

Apple (NASDAQ:AAPL) shares have had an incredible run this year, returning over 43% over the last 12 months. The shares held strong last week, up .65%, and over the last month, are down less than a percent. Earnings are projected to grow 14% next year and 12% over the next five years. In a recent letter to Apple's CEO Tim Cook, activist investor Carl Icahn argued that the company's shares were grossly undervalued and estimated earnings growth will be much higher than the consensus. Moreover, Icahn placed a $200 per share value on the company. He also urged Cook to share repurchases. With strong iPhone 6 sales, impending product releases such as the Apple Watch and an activist investor in Cook's ear, Apple's stock should continue to climb. I believe Apple will maintain its current earnings multiple, and based on next year's estimated earnings of $7.27, the shares will reach $120 over the next 12 months, if not sooner.

Gilead

Gilead Sciences (NASDAQ:GILD) shares are up slightly over the last month, but were down 3% last week. Of my five picks, Gilead suffered the most during the sell-off. Nevertheless, compared to its peers Celgene (NASDAQ:CELG) and Biogen Idec (NASDAQ:BIIB), Gilead fared much better during these time periods. Additionally, the Nasdaq Biotechnology Index was down over 5% for the week, and down 2.8% over the last month. More importantly, Gilead's growth prospects are stratospheric, with its hepatitic C franchise blockbuster, Sovaldi, and the just FDA-approved Harvoni. You can read my complete bull thesis on Gilead here. I believe Gilead's shares will reach $125 a share by the end of this year and $150 by the end of 2015.

Summary

In this turbulent market and recent dire sentiment, these five stocks offer a safe harbor. Each has weathered the last week and month's violent downdrafts relatively unscathed, and all but Gilead pay a small dividend. With an improving economy, housing and labor market, cheaper gas prices and an anticipated strong earnings season upon us, I believe these companies offer investors solid value, great growth prospects and relative stability going forward. In subsequent articles, I will update the performance of this "doomsday portfolio."

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.