Bright Future Rebound Stocks
Two Signs of a Stock Price Turnaround
Bright Futures and Attractive Prices
Value investors like to say that the stock market is the only place where they hold a sale and no one shows up. In other words, investors tend to be least interested in buying stocks just when the buying is best.
Of course, unlike ordinary shoppers, investors never know when the sale is going to end. Prices could always be lower tomorrow or in a month. That fear, not an aversion to saving money, is what keeps investors out of the market when prices are low.
And it’s often a good instinct. Investors who took advantage of low prices in oil stocks or commodities earlier this year are now seeing the “sale” in these assets drag on so long that it’s turned into a fire sale—one that not all companies will survive.
But market timing indicators can give you a pretty good idea of when prices are starting to move sustainably higher, and today, our signals are suggesting that the sale may be just about over.
The major indexes have pushed through some important resistance levels in recent days, and several secondary indicators (including sentiment and new lows) support the argument that prices have gotten as low as they’re going to get.
The question now is what to buy. Dividend stocks are a good place to start.
Two Signs of a Stock Price Turnaround
I’m still avoiding energy and basic materials stocks, which are fighting persistently low prices in their industries. I also recommend avoiding stocks that are technically “broken,” meaning they’ve recently declined sharply and are still full of wannabe sellers. Speculators and traders might be able to make some money on quick snapbacks in these names, but serious investors can do better.
For long-term investors, now is a great time to look for high-quality investments that have been dragged down—ideally over a period of several months, so most of the sellers have already bailed—and are now starting to turn around.
The key to reducing risk in these situations is to wait for signs of a real turnaround to appear before investing. That means 1) the beginning of an uptrend (and the end of the downtrend) in the stock, and 2) improvement in revenue and/or earnings.
You still won’t be right 100% of the time, but using these filters in your bargain hunting will eliminate the most hopeless situations and significantly raise your odds of success.
I recently ran a simple screen for dividend stocks that match these criteria and found 38 stocks that fit the bill. I eliminated some that are in the still-high-risk energy and materials sectors, as well as a few in industries that are disappearing, like Iron Mountain (IRM), which handles and stores documents for businesses, and Windstream (WIN), a landline telephone company.
What was left is a watch list of high-quality dividend stocks with bright futures selling at attractive prices. I’ll share three of my favorite stocks today and another three tomorrow.
Dividend Stock #1: Applied Materials (AMAT)
A provider of equipment and services to the semiconductor and solar power industries, AMAT has fallen 25% over the past 12 months. But the company wowed investors with very strong 2016 guidance this month, and the stock has popped 10% since. AMAT yields 2.1% today and has paid dividends since 2005, although the dividend hasn’t increased since 2013.
Dividend Stock #2: Brinker International (EAT)
Down 18% over the past year but up 9% in the past quarter, Brinker owns the Chili’s and Maggiano’s restaurant chains. Brinker reported earnings per share of $0.78 in the latest quarter, up 9.9% year over year, but comp sales were down 2.6% for the quarter. However, investors have latched onto management’s announcement that sales improved over the course of the quarter, suggesting a better quarter ahead. Sales are still struggling in Texas and Louisiana, two of the company’s major markets, due to low oil prices (an important economic driver in the region).
In the face of these revenue challenges, the company is focusing on maintaining financial performance through cost cutting, and also benefiting from low commodity prices. Longer-term, the company is pursing a turnaround that emphasizes innovations to its menu and a greater emphasis on the bar experience at its restaurants. The company is targeting EPS growth of 10% to 15% going forward; analysts expect EPS growth to average 13.5% over the next five years.
Dividend Stock #3: Cummins (CMI)
Cummins is an engine maker that yields almost 4% and has raised its dividend every year since 2010. After over a year of declining sales, net income rebounded strongly in the latest quarter, and analysts expect Cummins to report 0.6% EPS growth in 2016 and 3.8% growth in 2017. The stock looks to have put in a decent bottom in January, after falling 31% over the past year, but still trades at a very reasonable 12 times forward earnings.
I’ll publish the names of three more of my favorite buy low opportunities tomorrow, so keep an eye out for my message.
Chloe Lutts Jensen
Chief Analyst of Cabot Dividend Investor
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