A Pair of Defensive Picks

 | Jun 06, 2013 | 11:00 AM EDT
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I agree with James "Rev Shark" DePorre; the tone of the market has changed significantly over the last week or two. Markets are routinely closing at their lows of the day and the "Dip Buyers" seems to have temporarily disappeared from equities. The Dow, S&P 500 and Nasdaq are all sitting at one-month lows after Wednesday's big selloff. Investors who congratulated themselves for sticking with the markets through last month, despite the traditional noises around "Sell in May and Go Away," have to be wondering if the markets are slated for a "June Swoon." The S&P 500 is right at its 50-day moving average as well as its April highs. If there's no bounce off these levels, I believe we could see another 3% to 5% on the downside.

I look at that possible decline as a solid entry point for additional investment. I turned more cautious a few months back and fortunately have a decent amount of cash on hand to deploy.

Two stocks that I would love to add to at slightly lower levels have underperformed during the 2013 rally, are cheap right now and have had recent positive catalysts that should help move the stocks higher.

EMC Corp. (EMC): The market-leading data storage provider finally joined its large-cap tech brethren, Cisco Systems (CSCO), Microsoft (MSFT) and even Apple (AAPL), in announcing that it would pay a quarterly dividend. The shares will sport a yield north of 1.5%. Just as important, the company raised its stock buyback program by $5 billion and will buy back at least $3 billion by the end of 2014. The total $5 billion stock repurchase program would remove about 10% of the float at the current stock price and Wells Fargo analysts believe that this new buyback authorization could lift earnings per share by $0.11 in 2014.

The stock has shown weakness on concerns about recent cash flow guidance, but COO David Goulden used a conference after the bell last night to reassure investors. The stock closed Wednesday at $24.30 per share. If it hits $23, I will be adding to my core position. EMC is cheap at 11.5x forward earnings and growing revenues at about 8% clip. Its new capital allocation strategy is a good use of the company's substantial cash position, and it should help put a solid floor on the stock. I don't see much downside on the shares, and it is a good defensive pick should the markets slide further.

ConocoPhillips (COP): Income investors can get a better yield (4.3%) at lower valuations with COP than they can in consumer-staples stocks, as well as most of the utilities. Conoco has done a good job of rewarding investors by spinning off its refinery operations via Phillips 66 (PSX), which has roughly doubled in price since being spun off last year. Given the yield, the stock is cheap at 10x trailing earnings and just over 5x operating cash flow.

Other positives include that the company has reached its asset divestiture goal recently and was named by Barclays as one of the best values in the energy sector. The investment bank also raised its price target to $80 per share from $67. Conoco is also one of the biggest players in the Eagle Ford region, which is seeing better than 50% growth in oil production year over year, and the Obama administration just gave permission to Conoco-led Freeport LNG to be the second U.S. liquefaction project to export chilled natural gas to countries without free trade agreements with the U.S.

COP closed at $61.62 Wednesday, and I will be adding shares if the stock gets down to $60 in any market selloff.

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