Navigating an Overvalued Market, Part 3

 | Feb 25, 2013 | 10:00 AM EST
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In my previous two columns, I discussed why I believe the market is overdue for a pullback and how I am positioning my portfolio for that event. I don't believe we are due for more than a 5% to 8% selloff, and the S&P 500 and Dow Jones Industrial Average might even reach all-time highs before experiencing this decline. But I believe a slowdown in consumer spending will trigger some turmoil that the market will have to overcome over the next couple of months. Today I highlight a few stocks on my buy list if they pull back 5% or so. I would love to add to my current positions if we do hit a downdraft in equities. All of these picks have little dependency on consumer spending, sport reasonable valuations and pay decent dividends as well.

Cisco Systems (CSCO): I agree with Stephanie Link that there is value in this networking stock. It is cheap at less than 10x forward earnings and a dividend yield of 2.7%. The company is growing revenue at a decent 5% annually and has a huge amount of net cash on its balance sheet, which accounts for better than 25% of its current market capitalization. The stock currently trades at close to $21 a share. I plan to add to my current position if shares dip below $20.

General Electric (GE): The industrial giant recently sold its remaining stake in its media assets to Comcast (CMCSA). It also has done a solid job of reducing its dependence and exposure to its financing businesses over the last few years. The company is becoming a bigger pure play industrial concern that will be driven increasingly by demand from emerging markets such as locomotives, jet engines, and big-ticket medical technology. GE yields more than 3% and sells at less than 14x this year's expected earnings. The stock trades at just under $23.50 and would peak my buying interest if it drifted below $22 a share.

Occidental Petroleum (OXY): This large oil & gas producer sells at less than 11x 2014's earnings projections but less than 6x operating cash flow. The company has also doubled its operating cash flow over the past three years. It should increase revenues by around 6% in 2013 and has beaten earnings estimates each of the last three quarters. OXY also yields 2.6%. The stock currently sells at a bit over $83. I would add to my position anywhere in the $75 to $80 range, where it has found technical support over the last year.

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