Will January’s Terrible Results Doom Stocks In 2016?

The S&P 500 lost 7.5% in the first eight trading days of the year, a dismal way to kick off the new year. At this rate, 2016 is sure to be the market’s worst year since 2008’s 36.6% loss.

Or is it?

#-ad_banner-#History tells us such predictions are folly. True, you’ll see plenty of articles implying the opposite. They’ll say this could be the worst January ever, and that the market is already doomed to a negative calendar year. There’s some validity to that prediction. Being several percentage points in the hole will make it difficult for the market to rally enough to generate a strong positive return for the full year. After this 7.5% drop, the S&P 500 needs gain of 8.1% to get back to break-even for the year.

But regardless of the market’s total return for the 2016 calendar year — an arbitrary time period for most investors — can we make any predictions about the future direction of the market after this poor beginning?

Let’s look at the historical record.

Since 1950, the S&P 500 has had a negative January 26 times. In the succeeding 12 months (February through the following January), the S&P 500 had a positive return 14 times and a negative return 12 times, with an average increase of 0.19%. That’s not exactly an indicator of an impending bear market. Note that these figures are based on price appreciation only, not total return (including dividends).

The lesson is not that a negative January isn’t bad news, but that it’s as likely to be followed by a positive 12 months for the market as it is to be followed by a negative one. As always, the smart money will focus on industries and companies with attractive valuations and the wind at their backs. Among other areas, the current environment favors financially strong value stocks with relatively low exposure to China and emerging markets.

I’ve recommended several such stocks in recent articles. Here’s another one to consider.

B&G Foods (NYSE: BGS) isn’t as well-known as larger competitors such as General Mills (NYSE: GIS), Mondelez (Nasdaq: MDLZ) and Unilever (NYSE: UL). But its shelf-stable products are found in every supermarket and most Americans’ kitchen pantries. Top brands include Accent, B&M, Cream of Wheat, Don Pepino, Emeril’s, Ortega, Pirate’s Booty, Polaner, Mrs. Dash and Static Guard, among many others.

B&G’s strategy is to buy established brands and improve their profitability. In November, B&G made its biggest purchase yet, completing the acquisition of the Green Giant frozen-foods brand from General Mills. The deal, which most analysts applauded, expanded its product offerings and added a premium brand that boosts revenue and earnings from day one. Frozen foods now will account for about a quarter of B&G’s revenue.

B&G has a successful record of integrating acquisitions and growing its operating income while maintaining profit margins among the highest in the industry. Another plus in this climate is that the company is not highly dependent on China or emerging markets; although it sells its products around the world, international growth is not a heavy emphasis of its growth plans as it is for many other food companies.

The company generates strong free cash flow, which allows it to keep debt low, buy back shares and pay a healthy dividend, which it has increased every year since 2007. The stock currently yields 4.0% and is attractively valued relative to its growth rate and peers.
Risks To Consider: B&G’s integration of Green Giant could be complicated by the parent company’s lack of experience with frozen foods. B&G also could be caught up in selloffs in the overall consumer staples sector as the market rebounds and investors move toward more economically sensitive areas.
Action To Take: Buy B&G below $36.50. 

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