How to Decide What to Buy

 | Jul 31, 2014 | 4:04 PM EDT
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This, too, shall pass. But when? How long? How low? That's what I find myself thinking on an ugly day like today.

I mince no words about buying opportunities. I look at every decline as a potential source of better prices for stocks. Today is no different. If my charitable trust has cash, Stephanie Link (my co-manager on the ActionAlerts PLUS (AAP) portfolio) and I look for something to buy, something we have waited for, something we can circle back to and start a position or average down into.

The problem is that even with this first really big down day in a while, they are mighty hard to find.

So let me give you the check off of how frustrating it is at this very moment to find something to buy that's not too risky, especially if the selloff isn't done. There are plenty of reasons why that it might not be done -- not the least of which is that, despite all of the craziness happening around the world, the market is barely down from the highs.

First, I want to buy something that's down, really down. Not just a couple of points from its high.

That brings me to the industrials. So many of these stocks are down 10% or more from their highs. That's intriguing; but there's a problem. Most of the industrials are down either because they have big business in Russia or they have a lot of exposure to Europe which could be hurt badly by the sanctions we are putting on Russia. Or they have huge exposure to foreign currencies that are getting weak versus the dollar as foreign money flees to this country as a safe haven. That means earnings will be hurt in the future.

Let me show you how hard this is. Take 3M (MMM). It just reported a terrific number. I love this company and it had fabulous growth but much of it overseas. Tempting?

I don't know. It's a $141 stock that's only down 5 points from its high. That's not my definition of a discount. Second, that strong dollar could make people feel less comfortable with the company. Third, the world's gotten so uncertain that investors might shoot all multinational industrials first, and then discover they shot the wrong man later. That says wait until it comes down a bit more before pulling the trigger.

How about PPG Industries (PPG)? This is a sensational company that has come down 12 points in a straight line after reporting a fantastic quarter. But much of the turn of late has come from much better European sales and earnings. What happens if Gazprom, the Russian oil and gas company, cuts off the pipe to Europe because Putin wants to respond to all the sanctions being placed on him. Won't that slow Europe? That makes me want to buy PPG later, at a lower price.

How about Honeywell (HON), the multinational company that put up an amazing quarter? I just spoke to CEO Dave Cote and things sound very strong. However, the company is leveraged to autos and to aerospace. The former we are hearing might be in glut. The latter could be hurt because airplanes use a huge amount of titanium and Russia is the biggest producer of titanium. What happens if Russia bans the export of titanium? Plus, it is only down 6 points from its high, too tight.

But when I think about these sanctions and I debate who will be hurt the most, I stumble upon BASF, a gigantic producer of plastic that is based in Ludwigshafen am Rhein, Germany. Half of BASF's fuel to make plastic comes from Gazprom. Hmm, is this a competitive opportunity? Dow Chemical (DOW) has been at the forefront of using U.S. natural gas, which has been going down in price because of the glut we have in this nation. I like that edge.

Because of this flight-to-safety trade that includes buying the dollar and U.S. bonds, interest rates are going lower -- even if you would think they shouldn't be -- because of the 4% gross domestic product (GDP) number our government announced yesterday. Dow yields 3%, which is better than Treasuries. That's another competitive advantage. And Dow has an activist investor, Dan Loeb, a very powerful and smart money manager who is pushing management for change or maybe a breakup.

Sure, the stock at $51 it is not down that much from its $54 high. However it just reported a terrific number and if it weren't for this geopolitical madness it would be much higher. Voila, I have found something I can buy and continue to buy if it goes down more, as the yield will protect the investment.

Now, let's move on to other sectors. Finance and tech are the two biggest. Is there anything there? I immediately ruled out the financials because, one, they aren't down very much today. Two, rates are going back down, not up. That means earnings aren't going higher because banks need higher rates to beat estimates.

Tech is tempting, but there are big sales in Europe that could hurt the numbers. But that's too glib. We just got fantastic numbers from Facebook (FB). I like that. However, the AAP trust owns it already and it is trading above the basis. I try never to violate the basis, meaning pay up from my average price.

Microsoft (MSFT)is intriguing, and I like the new management team. However, it's up! Grrr! Intel (INTC)? It's barely down. I want a discount. Apple (AAPL) is down $2 and I find it tempting, after listening to T-Mobile's (TMUS) CEO John Legere this morning talk about the iconic nature of the iPhone 6, which is about to launch. He must know something, I figure. However, the trust already owns it at a much lower price and at $96 it's barely down from its $99 high.

Micron (MU) would have been tempting but Goldman Sachs has a note out saying that too much DRAM capacity, the principal product of Micron, is coming online. If anything, Micron could be a short instead of a long!

How about the soft goods as a flight-to-safety trade? I have always bought the food and drug stocks into economic chaos because people have to eat and they have to take their medicine. However, Kellogg (K) this morning just reported a really nasty number. So did Kraft (KFT). The group has got hair. The drug stocks need a weaker dollar, not a stronger dollar. All of the good biotech names are trading near their highs. I am taking a pass.

Oil? I love the oils. My favorite big-cap oil is Royal Dutch (RDS.B)? Opportunity? Hardly, it's up huge today: $1.75 on fantastic production growth of 4%. That's a stellar number,  especially when you recognize that Exxon (XOM), which shed $3 today, had -5% growth.

How about the domestic stocks? Hmm, they trade with West Texas Intermediate and, even though they are growing like weeds, I fear downgrades because the price of oil is plunging -- as is almost always the case when the dollar's strong. So nope. Next?

What about the utilities? Verizon (VZ) is interesting because of that yield, but it just rallied off that real estate investment trust gimmick that landline competitor Windstream (WIN) just executed. I think it needs to come down more -- especially after listening to how aggressive Legere was about T-Mobile's desire to steal customers from one and all. How about T-Mobile itself? Nah, up huge on a good quarter and a stake taken by a foreign phone company. Missed it.

Restaurants, retail? The best names are trading near their 52-week highs. The worst are too dangerous to own. How about my doomsday list of companies that buy back stock most aggressively, which could be a cushion? The no. 1 name was Time Warner (TWX) but now it's in a takeover mode. Forget that. CBS (CBS) is a huge buyer of stock. We just had Interpublic (IPG), the advertising firm, on "Mad Money," and CEO Michael Roth said that ad rates were soft, so that is dicey. Disney (DIS)? Holy cow, the stock is down less than $2 from its high and it reports next week. Why not wait?

Now, I could continue to tick off groups endlessly. But I think you see the point. With all of the uncertainty abroad and the lack of real price dislocation at home, there's not a ton to like yet. The best of the best are still high. Sure, I might miss a chance, but then again, that's why I am adding to Dow with all of the sideline cash the trust has because we have been so cautious of late.

So for the AAP trust, Dow it is until we see lower levels. I'm not being paid enough to take the risk, so patience, I believe, will still be rewarded. 

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