You can try to interpret the news line by line, or you can just watch the ticker tape to see what it is telling you. When you have the price of stocks, bonds and commodities all tanking simultaneously, it is a Market Flush scenario. That leaves no place for traditional investors to hide, other than in cash. The problem is that cash never rallies and based on our preliminary sentiment poll, we are expecting that bargain buyers will start to put out limit orders to see if they can get into many stocks that they missed out on.
24/7 Wall St. wanted to find four basic stocks that investors will flock back into that are defensive by nature yet should rise with the markets as well. Our take is that many stocks still have not sold off enough that they will entice bargain buyers.
We have chosen these stocks because of their dominance and given levels where we think buyers will start to put in limit orders or where historic interest has been. Just remember that when you have a “sea of red,” all ships tend to sink with the tide. As this was written, the DJIA was down 221 point at 14,890 and the S&P 500 was down almost 27 points at 1,602. All 30 DJIA stocks were lower and all of the defensive stocks were lower as well.
Obviously there are other stocks that investors will look at for buy-in entry points. The problem is that many of the key go-to stocks have just not sold off enough to make us think that investors are going to want to pile back in. After all, bargain hunters want a bargain.
American Water Works Company Inc. (NYSE: AWK) is the largest water utility in North America. It is a truly defensive stock and investors might not need to worry about it being a utility stock that benefits only from very low long-term borrowing. The stock is still not yet 10% off of its highs, and any time that this has sold of by 10% it has been a gift from the markets. Its yield of 2.7% might seem low for a utility, but water utilities have lower common stock dividends than electric utilities. Try living without water and let us know how that works out for you. This has a true monopoly in each of its markets. With a 52-week (and all-time) high of $43.09, a 10% correction would be at $38.78, and that is about $1 lower than today.
AT&T Inc. (NYSE: T) might not be an exciting story in telecom, but investors know that it has the highest yield of all 30 DJIA stocks at 5% now. It has financed much of its long-term debt at lower yields, and it is unlikely to be forced into a Verizon-Vodafone situation that will come with much dilution, particularly after its own attempt to grow via M&A was blocked. AT&T shares hit $34.75 on Thursday, and that is now down 11% from its 52-week high of $39.00. A similar sell-off plagued AT&T last year, and buyers made out well who bought when the stock formed a base after trading under $34 back then.
Kimberly-Clark Corp. (NYSE: KMB) was our favorite pick for quite some time in the defensive consumer products sector. The problem is that the entire consumer products group became very overvalued as investors chased safe dividends way too high. With shares down almost 2.5% more around $94, the stock already has pulled back over 10% from its high of $106.54. The 3.3% dividend is higher than most peers, and its $36 billion in market cap is not so large that it takes too much money to move the needle here. Buyers are likely to start coming back if the price gets down closer to $90 again. Is that $91 or $92? The valuation is back down to about 16.5 times expected earnings, and it might not have to get back down to 15 times earnings to bring in new investors again.
Wal-Mart Stores Inc. (NYSE: WMT) also is sliding with the broader market, but it is the one retailer where investors went to hide during the recession. Dollar stores may be a threat and also may be a great place to hide, but Walmart is the one-stop low-price shopping destination for Americans. Its yield is 2.5%, and the retail giant is spending billions to repurchase its shares on the open market. With a recent high of $79.96, the current price is down to $73.50. Walmart shares finally broke out to new highs, and it seems that if shares get back down closer to $70 then investors might start coming out of the woodwork to buy the biggest retailer in America. The selling easily can continue here, but at 14 times earnings it will not scare too many investors away.