"Buy when there's blood in the streets." Of all the investing aphorisms, it's probably the most valid. It's only logical that when the whole market suffers a sharp selloff, some individual stocks must get caught up in the carnage despite their individual characteristics. When the market calms down, they'll rebound.
By that logic, this is a terrific time to hunt for bargains. The market is off to its worst start of a calendar year ever, down 8% in only 10 days. It's an emotional reaction to the market meltdown in Chinese stocks, and perhaps a shift in asset allocation now that interest rates have risen, even if only slightly. But it's certainly pulling down some excellent stocks that are now available at much lower valuations than they were just a couple weeks ago.
Whenever I'm confronted with that question, I think about what companies make sense to buy and hold for the long term: leaders in growing markets with established brands, protection from competition (either because of their own superior products or because the market is difficult to enter) and financial strength -- including robust recurring free cash flows. Dividend growth and an above-average dividend yield is a plus, because it provides shareholders rising income and affords the stock a floor during bear markets.
Many such companies are household names. Most are global players. Some are more limited geographically and lesser known to the general public but well respected within their industries. But they're all the kind of stock you could buy, forget about for a few years, and come out pretty well on the other side -- even if they continue to drop for a few more days or weeks.
Here are three such companies that are selling at bargain prices thanks to the market's swoon, in addition to these three high-quality stocks I recently tabbed as buying opportunities.
Citigroup (NYSE: C) has transformed itself since the financial crisis, shedding its riskiest businesses (including hedge fund and private equity activities), focusing less on international loans and shoring up its balance sheet. By reducing leverage and targeting its core strengths, Citi is now well positioned to benefit from rising short-term interest rates in the coming years. It remains one of the nation's premier money center banks, with more than 200 million customer accounts and over 4,600 branches.
Having fallen significantly in recent weeks, Citi now trades at 30% below the per-share value of its assets and at only 7.6 times analysts' consensus estimate for 2016 earnings per share. The stock yields only 0.5% at current levels, but that dividend is secure and should rise, given the company's strengthening balance sheet and rising cash flows. Citi is buying back shares like they're going out of style, which also will boost per-share values.
Shares of ExxonMobil (NYSE: XOM) are near a four-year low, punished pitilessly by the investors due to the historically low prices of oil and gas. But most energy analysts expect supply and demand dynamics to result in a bottom for energy prices this year, perhaps as early as spring. Once oil starts moving higher again, the stock should rebound significantly. The world leader in oil exploration and production and petrochemical production, ExxonMobil remains a juggernaut: financially rock-solid despite the downturn, the company has spent the downturn shedding lower-margin assets and businesses and making strategic investments in its already large, diverse portfolio. And although climate change is moving governments toward aggressive promotion of alternative energy sources, oil and gas will remain major sources of fuel for decades.
The stock yields 3.8% and trades at only 24.4 times analysts' current consensus estimate for 2016 -- which surely will rise if crude prices move higher.
Walt Disney (NYSE: DIS) is down 11.3% over the past month, an odd occurrence for the company that just released the most successful movie of all time. The Star Wars franchise is but one valuable asset that analysts think will drive Disney's cash flows higher in the coming years; others include Marvel Entertainment; Pixar Studios; the ABC, ESPN and Disney Channel networks; and the company's theme parks, which are enjoying strong sales and earnings growth in the United States and should get a boost as they leverage Star Wars content going forward.
It's true that Disney has exposure to China in various forms, including a theme park in Shanghai. But investors' biggest concern lately has been ESPN, the company's longtime cash cow, which is losing subscribers and viewers due to the migration away from traditional TV toward mobile devices. But Disney is too smart to allow an asset like ESPN erode. If anyone knows how to monetize content, it's Disney. The company is moving deliberately but decisively toward "direct to consumer" platforms, and it's a solid bet that it will succeed in "saving" ESPN in this way. Sports are not going out of vogue anytime soon, and ESPN is the premier sports platform. Note that Disney owns a third of online entertainment hub Hulu and has invested strategically in YouTube channels and other "new media" platforms and content creators.
Disney is extremely strong financially, with rising cash flows and low debt despite regular capital investments. It has aggressively increased its dividend and now yields 1.4%; I predict more dividend hikes in the coming years. Best of all, the stock now trades at 16.7 times analysts' consensus estimate for fiscal 2016 earnings per share (ends September 2016). That's a great valuation for this global leader.
Risks To Consider: As global leaders in finance, energy and entertainment, all three stocks are vulnerable to economic shocks, such as even worse economic performance from China.
Action To Take: Buy Citigroup below $46, ExxonMobil below $79 and Disney below $98.
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