Tuesday, November 23, 2010

Toes in the Water

   After yesterday's sharp decline in the markets and stark reversal thanks to a few high-flying names, the market appeared to be sitting on fragile ground. When North Korea fired several artillery shells at a South Korean island overnight, equity markets dropped across the globe. Combined with fears of European sovereign debt and slowing Chinese demand, the global economic outlook is showing signs of strain. Although Ireland appears to have an EU/IMF bailout in place, all eyes are quickly shifting to Portugal and Spain. As concerns creep back into the marketplace, today marked a strong "risk-off" day.

   For those who have been reading this blog, my outlook for the market the past several weeks has clearly been cautious at best. In the previous post, Optimism Reigns, I went as far as calling for a 5-8% correction in the near future. As equity markets sold off today, the Dow briefly broke below 11,000, marking a nearly 4% drop in just over two weeks. Although I expect the decline to continue for at least another week or two, for the first time in a couple months, buying opportunities are showing up on my watch list. 

   Abbott Laboratories (Ticker: ABT) is a broad-based health care company that discovers, develops, manufactures and markets products and services that span the continuum of care – from prevention and diagnosis to treatment and cure. Abbott's principal businesses are global pharmaceuticals, nutritional and medical products, including diagnostics and cardiovascular devices. Abbott's earnings have grown nearly 27%, on average, the past three years and are expected to increase an average 11% for the next three. On top of earnings growth, the company currently sports a dividend yield of 3.75% and has increased dividend payouts for 38 consecutive years. The stock currently trades for only 10 times forward earnings expectations making it a strong value play and a good buy under $47 (closed at $46.95 today).

   RR Donnelley (Ticker: RRD) provides solutions in commercial printing, forms and labels, direct mail, financial printing, print fulfillment, business communication outsourcing, logistics, online services, digital photography, and content and database management. No question business has been tough due to the recession and a technological shift to online advertising. However, as the largest printer in North America with strong positions across the globe, earnings should improve as advertising picks up. Earnings are forecast to grow about 17% next year while the stock currently trades at just over 8 times forward earnings. The most enticing feature of owning the stock is its current 6.5% dividend yield. RRD closed at $15.97 today and I'd be a buyer below $15.85. 

   Given the murky outlook for economic and equity growth over the next year, the aforementioned stocks offer comparable yields to bonds with potential for further capital gains. As mentioned earlier, the recent downtrend is likely to play out for a bit longer and therefore I'm hesitant to dive in on the long side. At this point, buying a third of a typical position and waiting for further pullbacks would be advised. While the outlook remains rocky, the timing seems right to dip a couple toes in the water.

Disclosure: Investors should do their own analysis of all recommendations to determine their suitability for any portfolio. Long ABT and RRD.

No comments:

Post a Comment