16 bargain stocks to buy before the bailout
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Sep 29 2008, 09:36 PM
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This post is by MSN Money columnist Michael Brush:
Unless you’ve been in the markets for over two decades, you’ve never seen anything like the one-day wipeout that took major indices down a gut wrenching 9% Monday. The last time things got this ugly was during the market crash on Oct. 19, 1987.
So like a lot of people, you may be dazed and confused -- and wondering what to do with your stock portfolio or even your money in the bank.
Seasoned money managers and market experts I spoke with after the close Monday expect a financial rescue plan to be approved by the end of the week. Between now and then, expect more turmoil that will give you an opportunity to pick up some bargains. Just avoid the financials.
Here’s a five-point plan for surviving, and profiting from, what happens over the next week and beyond:
1. Expect a bailout towards the end of the week.
The financial rescue plan died in the House largely because of ideologues on the right, who oppose greater involvement of government in the private sector.
They made their point. But now they have a new problem: Turmoil in stocks and the credit markets will almost surely continue until lawmakers agree to some kind of bailout plan.
“There’s no question they will act. It’s just a question of how bad things get before the ideologues wake up,” says Whitney Tilson, a co-portfolio manager of the Tilson Focus Fund.
“They were not convinced the sky was falling, so the sky needed to get a little closer to their heads,” says Eric Barden of Barden Capital Management in Austin, Texas. “A couple more days of this and there is going to be political pressure to swallow a deal. I have to think it is political suicide for House Republicans to try and stand in the way of the bailout plan.”
“We will reach a threshold for the amount of pain that certain people in the House of Representatives want to cause the rest of us in their anger over the cost of the bailout,” says David Nierenberg of Nierenberg Investment Management. “When Congress realizes it has caused sufficient punishment indiscriminately to the right people and to innocent people, then it will do the right thing.”
Like other money managers I spoke with, Nierenberg thinks that will happen by Friday.
2. Expect a lot of market turmoil between now and then.
Approval of a rescue plan would stabilize the markets. In the meantime, stocks will continue to be volatile, with more downside very likely.
“Stock will go down 5% a day until Congress passes a bill,” predicts Tilson. “I would be surprised if there is a sharp rebound until there some clarification on the rescue package,” says Barden. “My guess is the market continues to suffer.”
History shows that a common scenario after such a big one-day drop is another woosh down during the first hour and a half of trading the next day, Tuesday, followed by a reversal. “Now we just need the final short-term washout and reversal, and we should then be well on our way to a better long-side trading environment,” says Jason Goepfert of SentimenTrader.com..
But he warns the cost of failure in making such a short-term bet can be great. “We saw this level of selling just before the ’87 crash,” he says. “If we just keep selling off Tuesday with no upside reversal after the first one to two hours of trading, then we better hold on to our hats, and expect a massive announcement from the government.”
3. Use the turmoil to pick up cheap stocks.
“You are seeing panic selling, so there’s a real discontent between what stocks are trading at and what the fundamentals are,” says Craig Hodges of the Hodges Fund. “There is a buyer’s strike.”
In the sell off, Hodges likes energy stocks which he describes as “coming absolutely unwound.” High on his list are: Transocean (RIG), Atwood Oceanics (ATW), Chesapeake Energy (CHK) and Devon Energy (DVN). “I don’t think we are going to stop heating our homes and driving our cars, yet the stocks are trading like it’s over now,” says Hodges.
He also likes the shipper DryShips (DRYS) and Potash of Saskatchewan (POT) which sells fertilizers and feed products. Like the other money managers mentioned here, he has positions in stocks he mentions in funds he manages.
Barden thinks this is the time to be getting out of “safe” investments like government bonds and moving it into riskier plays like stocks that have been beaten up. “Basically to me this is a transfer of wealth from investors who lack staying power to those who have staying power.”
Like Hodges, he likes energy plays: particularly XTO Energy (XTO) and Chesapeake. He also thinks China Mobile Limited (CHL) has been overly punished because it is a major position in China-related exchange traded funds like iShares MSCI Emerging Markets Index (EEM), which are being liquidated by hedge funds.
Tilson, who has made several great calls in the market confusion of the past few months, likes Fairfax Financial Holdings (FFH) because it has bets against financial stocks – bets that should benefit as that group continues to have problems. He’s also a fan of Berkshire Hathaway (BRK.A) because it is trading well below its intrinsic value.
Nierenberg says top positions in his portfolios that look attractive because they are down so much include Superior Energy Services (SPN), NATCO Group (NTG), MedCath (MDTH), Asset Acceptance Capital (AACC) and Move (MOVE).
4. Avoid financial stocks.
They’ve gotten hammered, but there’s so much uncertainty about what’s on their books that it’s hard to know what is going to happen next. “There is still no visibility. That’s the problem,” says Hodges.
5. Don’t worry about your money in the bank.
It’s safe. The Federal Deposit Insurance Corporation (FDIC) has enough funds to insure your deposits, as long as you are under the legal limits of $100,000 per account, more for joint accounts and retirement accounts. Don’t rush to the bank to get money to put under the mattress. You will only be making things worse.
At the time of publication, Michael Brush did not own shares of any of the companies of funds mentioned in this column.
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