Traders should take advantage of market fears to buy these names on sale.
We’re firm believers that investing is most successful when it’s most businesslike. One way to do that is to find companies that are attractively valued, and then buy them when they’re on sale.
It’s a lot like buying groceries and taking advantage of the occasional offer that allows you to stretch your dollars further.
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Of course, in the real world, it’s tough. Our emotions come into play. But we need to set those aside and look at the facts.
Market fears come and go, and the market may be more than halfway through its next 10 percent pullback from all-time highs. Investors have gotten complacent in recent months, but now they’re just as likely to avoid buying good names at more decent prices. Here are two contenders:
Beaten-Down Blue Chip #1: American Airlines Group (AAL)
The coronavirus fears have done two things. They’ve created a lot of uncertainty with tourism. That’s bad for airlines.
But the fears have also crushed oil prices, which have now slid to a bear market. That’s good for airlines. One of their biggest variable costs, fuel, is now likely to head lower.
With many airline companies now pulling their guidance on this uncertainty, traders have less data to go on. That’s led to a selloff.
Many names are rapidly heading to 52-week lows. One of them is American Airlines, whose shares are now one-third below their 52-week high.
Shares weren’t overvalued to begin with, but now thanks to this slide they look undervalued. Some of the stats are impressive. Shares trade at just 4 times forward earnings. The company trades at less than one-quarter its price to sales.
And while the recent fears will put a dent in this number, the company has managed to grow earnings by nearly 28 percent in the past year.
Then there are the company insiders, who own 40 percent of the company. They’re not looking to beat earnings every quarter and keep traders happy. They’re in it for the long haul.
We expect a recovery as the virus fears fade out. Clearly, how long that will take is still an unknown. But we see shares as fundamentally undervalued and likely to move higher in time.
For now, investors should look to buy shares up to $25.00. At that price, they’ll get a 1.6 percent dividend yield.
Traders should consider the January 2021 $28 calls. Currently trading for around $2.40, they’re an inexpensive bet on shares shrugging off their recent weakness and moving higher at some point this year. Traders should look for a quick mid-double-digit bounce to grab some quick profits on a recovery.
Beaten-Down Blue Chip #2: Walgreens Boots Alliance (WBA)
Shares of this drugstore chain are closing in a 52-week low. But just a few months ago, shares were riding high.
Why? Because of a proposed buyout offer from private equity firm KKR. The proposed deal put the price of shares at $71.
Today, they’re trading under $50. While the buyout offer looked like a stretch, now shares look undervalued thanks to their steep selloff. They’re down 31 percent in the past year.
We see potential upside ahead. The company trades at just 8 times forward earnings. Revenue and profit margins are low, but for the mature space the company is in, steady performance from here are likely to send shares higher. And the company was already beaten down in 2019, a great year for most of the market.
Although the retail space can be tough, drugstore chains have long been a successful niche that manage to profit even in the age of online retailing.
This is also another play with a large insider stake—nearly 17 percent of the company.
With these factors in mind, we expect shares to head higher in time as well. Investors can buy shares up to $50, and lock in a dividend yield north of 3.5 percent.
The company has done an excellent job of raising its dividend over time. So even if market fears continue at the company, investors can start to rack up returns from the high and growing payout.
Traders should look at the July 2020 $55 calls. Trading for about $1.00, they’re a nice balance of upside potential and relatively low cost. They’ll likely move higher in the coming weeks as the current market fear plays out and dwindles away, offering mid-double-digit yields.