Even though the market has declined in the past few weeks, it looks like a bigger drop might be looming. A number of investors are still buying into the idea that the Federal Reserve will announce a QE3 program or take other measures to boost the stock market and the economy in general. However, the Federal Reserve is running out of policy response options and the market reaction to them seems to be waning. ISM and unemployment data show the U.S. economy is slowing down, even though it barely ever rebounded. Furthermore, the European economy is already in a recession depending on which country you live in, and China appears to be slowing even more than most expected.
The biggest problem looming for stock markets could be a potential financial crisis that spreads from Europe, and the fact that earnings season is just about to start in the U.S. This is shaping up to be the first quarter in which major weakness in Europe and China will probably be registered in the financial results of American companies. It's also likely to be the first quarter where the sharply weaker euro and stronger dollar could impact U.S.-based multinationals. It's not just earnings that investors have to worry about, forward guidance issued by companies can take a stock down hard, even if current financial results are good.
I expect many companies to report disappointing earnings and guidance. Combine that with the fact that Europe's problems are very serious, and Spanish bond yields have climbed back to about 7%, and you have the recipe for what might be some very big down days in the market. To me, that means buying opportunities are coming soon and it's time to prepare your portfolio with a potential shopping list. One stock to consider in a big market pullback is Seadrill Limited (NYSE:SDRL). Here are some reasons why Seadrill shares could make sense to buy when the market is down sharply:
1) Seadrill is a global leader in offshore drilling and it has a fleet of about 63 units, which includes drillships, jack-up rigs, semi-submersible rigs, and tender rigs. This company has one of the most modern fleet, which allow it to charge higher daily rates. Newer equipment means fewer breakdowns and lower maintenance expenses.
2) The company is committed to a high rate of dividend income for shareholders. The stock now yields about 10% and as earnings grow, the payout could get even bigger. Seadrill has a history of dividend increases and the quarterly dividend is now around 80 cents per share.
3) Many of Seadrill's rigs are on long-term contracts and will not be affected by short- to mid-term fluctuations in the economy or the price of oil. In the long run, global population growth is likely to keep demand for oil and the equipment Seadrill provides at strong levels.
The reason why I think it makes sense to wait for a pullback is because the odds of a major market drop seem more likely than not. The global economy is clearly trending down, and that tends to bring stock prices lower, as well as sharp declines in the price of oil. When oil drops, stocks in the oil sector like Seadrill tend to pullback too. Seadrill shares have recently traded down to about $32, and patient investors might get a chance to buy at that price or even lower as earnings season gets underway.
Here are some key points for Seadrill:
- Current share price: $34.64
- The 52 week range is $24.68 to $42.34
- Earnings estimates for 2012: $3.16
- Earnings estimates for 2013: $3.57
- Annual dividend: $3.20 per share which yields about 10%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.