Two Picks for the Next Dip

 | May 23, 2013 | 1:00 PM EDT
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Equities got treated to a rare bout of volatility in Wednesday's trading. The Dow Jones Industrial Average rose more than 150 points early in the day, only to reverse itself to post an 80-point loss by the end of trading. It was the first time the Dow has been up over 150 points and ended the day down since March 2009.

Regular readers of my columns and Columnist Conversation posts know that I have been growing increasingly skeptical about the market rally over the last month or two. I have many of the same concerns as Doug Kass, as I believe the Fed is "pushing on a string," and the rally has consisted mostly of multiple expansion instead of being driven by earnings and revenue growth.

Investors learned yesterday how vulnerable the market is to any chatter about the Federal Reserve slowly withdrawing its massive largesse. That being said, I don't see any actual "tapering" of the Fed's Treasury-buying program for several months at least. I do expect a decent-sized correction (5% to 10%) by the summer, but I don't see it happening in a one-day meltdown like what happened overnight in Japan. I will be looking to put a sizable cash position slowly to work as we get more down days like Wednesday. Two of the equities on my shopping list are good values already, and the companies have also recently announced shareholder-friendly moves.

I first recommended LyondellBasell Industries (LYB), a large chemical manufacturer, in the middle of March. The stock price has moved up only a buck or two since then, and I continue to like the company for the reasons I outlined in that article. The shares are even more attractive, given the company's recent capital-allocation announcement. Management announced yesterday that shareholders have approved the company's plan to repurchase up to 10% of its outstanding float over the next 12 months and increase its dividend by 25%. LyondellBasell was cheap at 9x 2014's projected earnings before the buyback plan. With the new payout, the shares will also now yield more than 3%. I will be looking to increase my position in the stock should we get any pullback.

NetApp (NTAP), a provider of network storage solutions, just announced its first-ever dividend payout. It initiated a quarterly dividend rate of $0.15 a share. At its current price, the stock will yield 1.6%. More importantly, the company will increase its share-repurchase program substantially. NetApp will buy back $1 billion in stock over the next four months and a total of $2 billion over the next year. At current prices, this amounts to about 15% of the company's outstanding float.

NetApp can easily afford these moves, given the more than $4 billion in net cash on its balance sheet. Subtracting cash, NetApp currently sells for about 10x forward earnings. The company is going through a restructuring to cut costs. Importantly, Elliott Management has taken a significant stake in the stock and has been pushing for these changes. Elliott is the same activist fund that has successfully agitated for changes and has unlocked substantial shareholder value at Hess (HES).

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