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The Bear Finally Shows Its Fangs

|Includes: Aircastle Limited (AYR), LNGG

The market is seeing its second day of significant losses. This sell-off was predictable but offers opportunities to buy some high yielders reporting good news today. Value investors should keep their trigger fingers at the ready.

Aircastle (NYSE:AYR) handles leases and sales of high-utility commercial jet aircraft to passenger and cargo airlines worldwide. The company also makes investments in various aviation assets, including debt investments secured by commercial jet aircraft.

Four reasons AYR is a solid value pick at $14 a share:

  1. I have been positive and have owned AYR since it was at $12 inApril. The company just reported another quarter that beat consensus on the top and the bottom lines. This is the sixth time of the last seven quarters the company has crushed earnings estimates.
  2. The stock yields 4.7% and the company has raised its payout by 65% after escaping the financial crisis.
  3. AYR sells at just over 8x forward earnings, a low valuation for a high yielder.
  4. S&P has a "Buy" rating and a $16 price target on the shares.

Linn Energy LLC (LINE) is an independent oil and natural gas company with properties that are primarily located in the Mid-Continent, the Permian Basin, Michigan, California and the Williston Basin in the United States.

Four reasons LINE belongs in your income portfolio at $38 a share:

  1. It just bought Berry Petroleum (NASDAQ:BRY) for a 20% premium. This made me happy as I am a Berry shareholder as well as holding LINE. This is a good strategic acquisition for Linn Energy and one Tudor Pickering is positive on and Jim Cramer has called a "brilliant acquisition" on CNBC this morning.
  2. The stock yields 8.1% and the company has grown dividend payouts at an approximate 4% annual rate over the past five years.
  3. The company increases revenues by more than 50% in FY2012. Analysts also expected over 40% sales gains in FY2013, and this was prior to the Berry acquisition.
  4. LINE is selling near the bottom of its five-year valuation range based on P/S and P/E.

After seven straight weeks of gains, the market finally had a significant pullback yesterday. The NASDAQ and the S&P posted their biggest losses since November. The Dow Jones also had its second worst day of the year. Fed minutes showing disagreement whether to continue the extraordinary measures to support the markets and the economy was the main trigger causing the decline. Personally, I think it is past sad that the economy is still so dependent on Fed measures four years after the "recovery" began. I also think the market faces significant headwinds other than any change from Fed policy. I believe we are going to give up most of the gains we have had in the market for 2013 over the next few weeks. I do not expect a major correction but I do think we will see lower entry points in the near future. Here are the four main concerns I think investors should have on their radar. I will also share a few of the stocks on my "buy on weakness" list should they go 5% to 8% lower in the sell-off.


Simply put the continent is falling out of bed. European auto sales just posted their worst January since records started in 1990. Eurozone PMIjust came out and shows a deep and accelerating contraction. Greek workers walked out yesterday in a nationwide strike that was in protest of continuing austerity cuts. With overall unemployment of over 25% and youth unemployment at over 50% in Spain and Greece - it is hard not to see this sort of action not increasing throughout the year. Even the pope is getting out of town (the first pope to resign in 600 years). American multinationals like Dell (DELL) and McDonald's (NYSE:MCD) that get a good portion of sales and earnings from the continent could see the problems in Europe negatively impact their prospects in 2013.


My second major worry for the market is around earnings and the trend in earnings estimates. I believe investors have been taken by some of the games analysts love to play. At the end of the third quarter the consensus for fourth quarter earnings was calling for around a 9% gain Y/Y. However, by the end of the fourth quarter, consensus estimates were at a 1% to 2% gain Y/Y. When earnings doubled the expected new lower consensus, the market celebrated with a continued rally even though earnings look like they will come with about half the gain compared to where the consensus estimate was four or five months ago. In addition, investors are paying substantially more for a dollar of S&P earnings than they were a year ago. The market has rallied over the last year even as consensus earnings estimates for 2013 have come down significantly over that time span (see chart). Thanks to Gary Dvorchak who provided this important data point yesterday on his column onTheStreet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.