Dusting Off My Watch List

 | Apr 11, 2012 | 3:30 PM EDT
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While I wouldn't call the recent market declines a broad market selloff, investor sentiment seems to be taking a turn for the worst. While the S&P 500 is still up nearly 10%, year-to-date, some profit-taking seems to be taking place. With many investors still on edge, selling begets more selling. 

As a predominantly long-only investor, I naturally benefit from rising stock prices. But I  prefer stock prices to be declining, as this raises the probability that I will buy at an undervalued price. More so, I increase my investments' upside potential when I buy when others are selling. No one likes to catch a falling knife, and buying when prices are declining can often mean further declines after investing. Fortunately, precise timing is not a prerequisite for successful investment results. What is required, however, is preparedness -- being ready to commit capital when the moment presents itself. So now seems like a good time to review my ever expanding watch list again. 

Emerson Electric (EMR) is a high-quality business that is run by a straight-shooting management team built to for tough times. After hitting a high of $60 a share, the shares now sit at $49 and yield 3%. If the shares start yielding 4%, the company is a compelling business to own. The company provides essential engineering solutions and products to a wide array of industries all over the world. The company enjoys excellent margins and returns on equity and trades for less than 13x forward earnings. If the stock's price creates an opportunity to own it at a single-digit P/E, which would also mean a dividend yield of 4% or higher, Emerson promises both value and growth. 

AGCO (AGCO), a $4 billion supplier of agricultural equipment worldwide, has seen its shares fall from $59 to $43 this year. Agriculture is in a long-term boom cycle, as increasing food demand will keep grain prices attractive, which in turn will promote capital investment in equipment. At $43, AGCO trades for less than 8x earnings. If Mr. Market decides to hand out shares in the mid $30s, it's an offer that may be too good to pass up. 

PetMed Express (PETS) is small-cap company trading for $12.50 a share or a market cap of $250 million. What many don't know about this online seller of pet care products is that it also yields 4.7%. If the shares drop below $10, you will get a chance to own the only viable online retailer of pet care products with a yield of 6%. PetMeds is one of few surviving members of the dotcom boom of 1999. It's a debt-free company with over $50 million in cash on the balance sheet. What intrigues me about PETS is that it is an excellent buyout candidate.

PetSmart (PETM), the largest traditional retailer of pet supplies, doesn't have a strong online presence. PetSmart is a $6 billion juggernaut and could easily justify a takeout. Meanwhile, Amazon (AMZN) sells everything under the sun -- except a deep line of pet-care products. Since Amazon is not shy about paying up for expanding its business, PETS could be a perfect fit.

Having a watch list is one of the most basic ways an investors can remain prepared. Being ready to pounce when Mr. Market has a moment of irrational behavior can be the difference between average and above-average investment results.



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