My Correction Stock Picks
The market is going through a slump. There is a correction under way and it doesn't really matter what stock you own as they are all going down. The cause for this correction is once again China. It seems to me that this downturn is very similar to the one experienced during August of last year. Where we saw the S&P fall 11.2 percent going from 2102 on August 17 to 1867 by August 24. The market also saw a good recovery following that downturn as it climbed above the level we saw on the 17th, reaching 2109 on the 3rd of November. The market turned negative at that time due to very similar reasons that we are seeing the downturn today, mainly the worry about the Chinese economy.
The Chinese economy is obviously a large world player and a slowdown there could have a ripple effect to many parts of the world. That is why despite the fact that the US has been performing relatively well the market is being sold off in parallel with the Chinese market. The government in China devalued their currency, even though there seems to be a small debate whether it was the government or not, which too many investors signaled that the stimulus measures that have been taken are not working. This has caused some real panic in the markets, twice this past week the Chinese market has triggered automatic halting to the trading, which occurs if the market drops by 7 percent in a trading session. Many companies are still performing well and will continue to do so despite the slowdown that China is experiencing. I believe that this current correction presents an opportunity to pick up some stocks at much depreciated levels. I am not saying that the market will bounce back like it did after the slowdown in August, but that there are companies that should be able to bounce back due to their own performance. It is my personal opinion that this downturn is not a long term negative trend but rather just a correction and the markets will bounce back, maybe not as quickly as in August. The essence I feel that negative effects of China are being overblown.
I want to review the stocks that are on my list to buy at these lower levels. This is not meant to be an in depth analysis of each of these stocks. It is more an overview of the positives that I see and why they present a buying opportunity. I have previously covered most of these stocks and would refer you to those articles for a more in depth analysis.
Ford Motor Company (NYSE:F)
I have previously written about Ford and some of the positives I see in the stock. There is a big worry that the auto industry is coming to the end of its cycle and that car sales are going to fall. There does not seem to be enough evidence of this to me. The age of cars on the road is still high as compared to the average. Interest rates are still low making it much cheaper to purchase a car. Oil prices are depressed and seem to be staying there. The economy in the US continues to add jobs, the most recent report from December exceeded expectations by adding 292,000 jobs, and the unemployment rate is at 5 percent. These are all positive catalysts that I don't see changing in the near future. Car sales continue to set records and Ford is well positioned over the next year to reap the rewards of this. Car sales in the US at 17.47 million for 2015 just broke the record for the most cars sold in the history of the industry.
Ford will have their full production of the F-150 for all of 2016, which in and of itself should boost the earnings of Ford. Another positive for Ford is that their European operations continue to grow. The car market throughout Europe has also experienced strong gains over the past three years. The ECB has a large bond buying program in place that will run through at least September 2016 but Mr. Draghi said it may be extended beyond March of 2017. That should help keep rates low in the EU and should help the car market there continue to grow. The scandal with Volkswagen (OTCPK:VLKAY) should help other car makers take share in the region as well. In December Ford was the number one selling brand with sales up by 13 percent, Volkswagen saw its sales fall by 10 percent. Ford was already on track to breakeven in Europe for 2016, this should only help.
The other fear is about the Chinese market. While car sales have slowed in China and the Chinese economy seems to be slowing, I do not see car sales for Ford falling in the country. Bloomberg reported that In October of 2015 the Chinese government provided a stimulus to the auto industry, cutting the tax of passenger vehicle purchases. Analysts at Credit Suisse Group AG estimated that it could provide for an increase of near 3 million units a year. In 2015 the company grew sales in China by 3 percent. A more positive note is that in December they increased sales by 27 percent on a year over year basis. The days of double digit growth for car sales in China may be over (on an annual basis) but I still expect Ford to be able to increase their sales in the country in 2016.
The company is also due to raise its dividend in the coming weeks. I expect a nice raise to the dividend. Ford needs to be smart about the increase, I would prefer to see steady consistent increases that can be sustained in both good and bad markets rather than a large increase that is hard to sustain, I previously wrote an article that discusses the dividend for Ford more in depth. If a downturn in the auto market does happen then Ford has the balance sheet to be able to sustain that downturn. The company has been able to grow its cash position while reducing its debt. The company has been much more profitable in the past year and is expected to be much more profitable in the coming year, which enables the company to be able to continue to build its cash and reduce its debt. The table below shows the cash and debt position of the company.
Source: Company Filings
The price of Ford stock is currently $12.54 that is equivalent to a PE of 10.5 and a one year forward PE of 6.5 with expected earnings of $1.93 a share. The dividend is currently yielding 4.8 percent. If the company raises its dividend by $0.02 a quarter, which I expect it will at least raise this much, then at today's price you are getting a 5.4 percent yield. The level of the lake is going down and it is taking Ford with it, despite the positives that the company is experiencing. I think that the car market will continue to be strong in 2016 and that the positive catalysts discussed will push the stock out of correction territory.
Opko Health Inc. (NYSE:OPK)
OPK is looking to have a promising year regardless of what the market does. The stock has taken a beating during the slowdown. As it is a biotech stock without positive earnings it is ripe for selling when the market turns south. People want to be in more secure stocks and much less so on speculative stocks. That is the case for OPK as it was beaten down when biotech stocks sold off back in August. Now as the market has begun to turn south once again OPK is being sold off heavily. The stock most recently traded at $8.82.
There are lots of positive catalysts for the company that should drive the stock higher in 2016. I also recently wrote a more in depth analysis of OPK and why I think it is great buy. A large catalyst comes from the integration of BioReference Laboratories, which it purchased this past year. The integration should help Opko in the launch and sale of its 4Kscore Test. The test has a large potential and is the largest reason for the purchase of BioReference. Also the company acquired a strong positive and growing revenue stream with the purchase of BioReference.
The largest factor that should drive the stock higher is the ruling by the FDA on Rayaldee, the top drug prospect for Opko. It is expected that the FDA will make its approval decision in March of this year. It is also expected that the drug will be approved come that time. Rayaldee targets a market that has $12 billion in sales annually. It should be able to capture part of that market bringing in strong revenues for coming years.
The company also has a few different revenues that should come in from different sources one being a license of a drug to Pfizer (NYSE:PFE). Another that has come through a licensee. Tesaro, the licensee, of OPKO received FDA approval for the drug VARUBI. OPKO is set to receive up to $110 million of additional milestone payments and double digit tiered royalties. The drug was launched this past year.
Regardless if the market holds flat for the year I feel that OPK could see a large jump. If the economy turns south people who are sick will still need to get their medication. The company has a strong pipeline of drugs and many potential revenue streams coming in the next year. If the company receives approval for Rayaldee then I am sure the price will spike. This recent sell off has provided the perfect opportunity to build a holding in the stock before the catalysts discussed begin to take effect.
This is probably a suggestion that many will question at the moment. Seeing as this is a Chinese company and the market is melting down there and the economy appears to be slowing. That is probably why we saw the stock drop 19 percent in one day on the 7th of this month. I still feel confident in the stock and future success of the business. Despite the economic slow-down in China Jinko should continue to outperform. The company has expanded its operations to many more markets than just China. A slowdown in one market will not make this company fall apart. The US has grown from 2.8 percent of revenues in 2012 to 17.7 percent in 2014. The US recently passed a bill renewing the ITC, the main driver for solar growth in the US, with the passing of the bill we should see continued growth in the solar market (this I predicted in my article on the solar industry as a whole. Last year the company built a plant in Malaysia to supply the US and avoid paying higher tariffs, which should allow Jinko to continue to grow its presence in the US.
One of the other reasons that I am not worried is that despite the slowdown in the economy as a whole in China we have seen that the government is very committed to supporting the markets and economy. The country is also very committed to renewable energies and particularly solar energy. China has stated that it wants to have 100 GW of solar capacity by 2020. It has been called that the amount be doubled, either way the country has lofty goals for solar installation. It will not be able to achieve those goals if it does not continue to support the industry. So despite the slowdown in the economy I do not expect to see a slowdown in solar installations. This is a strong positive for solar manufacturers.
The company is very profitable and has been continuing to grow revenues and earnings. The company has grown revenues at over 30 percent on a year over year basis for the past three years. If you are worried about the economy in China the last three quarters for JKS have seen growth of 36.5 percent, 31.6 percent and most recently 58.2 percent. The company is not seeing a slow down at all. The company had a gross margin of 21.3 percent and a profit margin of 5.9 percent, showing its profitability. The company also trades at a cheap valuation that is despite the impressive growth that the company has seen. It appears that many investors are hesitant due to the worry about China and especially Chinese solar companies.
JinkoSolar has become a global company that distributes worldwide. The Chinese market has many worried and has caused the price to come down. The company has shown no sign of a slowdown, nut rather quite the opposite. China will continue to support the solar industry. The US recently passed a bill to continue to support the solar industry. It appears to me that Jinko will continue to grow despite what may happen in the Chinese economy. I am bullish on the solar industry as a whole and this dip has provided a solid entry point into my favorite stock in the industry. Please refer here for a more in depth analysis of JinkoSolar and why I am bullish on the stock.
Alibaba Group Holding Limited (NYSE:BABA)
While the first three are my preferred picks, and I have done much more research on the previous three and find them all to be underpriced and like the future for all three. I will admit that I have not done as much research on BABA as the other three. I am more of a fundamental investor rather than a technical investor. I do not claim to know the technical aspects of trading as well as many. That being said I think BABA presents an opportunity with the sell-off. The current drop in the market is very similar to that which we saw in August. The Chinese stocks are being hit harder than anyone, Alibaba included. Now I am not saying that it is a buy today. I actually think that the stock could see more of a decline. It reached a low of $57.39 on September 28. This was after the markets here in the US had already begun the bounce back. This decline continued even after the company met earnings expectations for the first quarter. The negative sentiment was still enough to keep pushing the price down. There were other negatives at that time that helped push the price down such as, the lockup expiration, a very negative article was published about the company, and also there was worry about counterfeit products being sold on the site. The price had already been under pressure before the decline in the market so it only helped to exaggerate the declines. There could be continued negative pressure on the stock even if we see the markets beginning to rebound.
Despite the many concerns and worries the company produced an earnings beat for the second quarter. It showed that its business was still strong despite the underlying concerns that investors had. The stock price moved up from the lows that it saw reaching $85.40 on November 4th. This selling period has a very similar feel for Alibaba as the decline that was experienced in August. The company has never produced any fundamentals that show weakness to me. Most of the selling for Alibaba has been due to news and different concerns. The company has continued to meet expectations and grow revenues despite the noise. The chart below shows the price history for Alibaba.
Source: Yahoo Finance
My play on Alibaba would be to wait for a sign of recovery in the stock price, a couple of positive days in a row could show that investors are gaining confidence again. Another option would be to wait for earnings to come out for reassurance that the company is still performing as expected.
I think that the China worry is being overblown and the sell-off has caused quality stocks to decline along with the rest of the market. This presents a good buying opportunity for many stocks. Ford, Opko, JinkoSolar, and Alibaba are my four stocks to pick up at depressed prices. Some of these stocks carry much more inherent risk that others, Ford is a strong value play while OPK is a strong growth play, regardless all have positive catalysts that make them a good opportunity in the current market.
Disclosure: I am/we are long F, JKS, OPK.
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.