12 Blue-Chip Bargains: Keep Calm and Hope for a Deeper Correction

 | Apr 06, 2018 | 1:00 PM EDT
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"We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful."

-- Warren Buffett

The stock market correction is making me feel like a kid in a candy store with a pocket full of change. Thanks to the scare, many world-class blue-chip stocks are back down to attractive levels. It's time to do some bargain hunting, writes Jim Powell, editor of Global Changes & Opportunities Report and frequent contributor to MoneyShow.com.

Jim Powell, Global Changes & Opportunities Report

The best way to find winning investments during a correction is to buy only the finest companies that have long histories of making it through deep downturns -- and then going on to new highs. Fortunately, many U.S. companies have the necessary track records.

Here are the sectors and their leading stocks that look the most attractive to me. Thanks to the correction, all of them are currently selling at discounts.

Energy Looks Especially Promising

Energy is at the top of the list of sectors that the correction knocked down to attractive levels. Several leading companies are emerging from a long downturn. After crashing from $147 a barrel in 2008, to a low of just $30 in 2016, oil has been inching its way back up. Last month, oil reached $64 a barrel -- a 113% gain. The price may drop back a bit, but the long-term trend seems well established: oil is finally in recovery.

Diamond Offshore Drilling (DO) should benefit greatly from higher-priced oil. Thanks to the energy upturn, many large oil companies are starting to spend big bucks to find and develop new reserves. As a result, Diamond Offshore earned $1.11 per share over the past three quarters, instead of the loss that many analysts expected. It was a welcome surprise. I think more profits are on the way for DO. Nevertheless, the correction interrupted the stock's recovery -- but I don't think it will stay down very long.

Exxon Mobil (XOM) isn't performing as well as Diamond Offshore Drilling. However, I think it will begin to catch up if the higher price of oil remains for another few months. Long-term, I think XOM will be a slam-dunk winner for investors who buy it now.

Both XOM and DO also have the potential to deliver much quicker -- and greater profits -- if the world should suffer another oil shock. A war between Saudi Arabia and Iran in the Middle East, or between the U.S. and North Korea, would be more than enough to send energy prices -- and energy stocks -- soaring.

VanEck Vectors Coal ETF (KOL) . I also expect a rebound for coal, a controversial energy source due to its link to pollution and climate change. Coal supplies 39% of America's electricity because it is usually the least expensive way to do it.

With the price of oil moving up, the outlook for coal is becoming increasingly attractive. However, "dirty coal" is still blacklisted on Wall Street. I think it's an opportunity for more knowledgeable investors to take positions in what should be a profitable recovery for coal.

Commodities Gain From Global Growth

Global economic growth is creating renewed demand for commodities and raw materials. Industrial metals are doing especially well. The list includes copper, iron, aluminum and nickel. To that group we can add lithium, cobalt, and several other rare earth metals that go into electric cars, mobile phones and dozens of other high-tech products.

Freeport-McMoRan (FCX) is my top recommendation for copper. The company is also an important producer of nickel -- another high-tech metal that's in short supply.

With a second housing upturn getting underway, continued global economic growth, and the explosive potential of electric cars (that use three times the copper as conventional vehicles), the long-term outlook for FCX appears to be excellent.

Glencore Plc (GLNCY) is the world's leading producer of cobalt, a metal used in the high-density batteries that power electric cars and many other devices. The scarce metal is up 120% so far this year, and should go much higher. I expect a long run of rising profits from Glencore.

Sociedad Quimica y Minera de Chile (SQM) is my recommendation for lithium, the most important battery metal. This company is best known in the U.S. by its NYSE symbol, SQM. Lithium now accounts for 60% of the company's revenues.

SQM is talking with Elon Musk at Tesla Motors (TSLA) to supply lithium for that company's electric car batteries. Even if nothing comes of the talks, the demand for lithium is rising so quickly that SQM should perform well for long-term investors.

Emerging Markets Get Another Leg Up

Speaking of a new raw materials cycle, the country that's first in line to benefit is Brazil. Orders for most of the country's resources are already rising. Brazil's biggest customer continues to be China, but the U.S. and several other countries are also eager to buy.

Brazil shines even brighter for its developing industrial sector that makes everything from jet aircraft to computers. In addition, the country's agricultural economy is doing well. It would be difficult to overestimate Brazil's potential for long-term growth.

For Brazil, I recommend the iShares MSCI Brazil ETF (EWZ) . The fund gained 22.1% over the past year and is likely to go higher.

The iShares MSCI India ETF (INDA) is also starting to move up. The fund was $31.13 on March 31, 2017, and is now $34.13. That's a modest 9.6 % gain, but I think a lot more is on the way.

India is not a raw material exporter. It is purely an economic growth play. With a growing population that is nearly as large as China's, and an expanding consumer sector, India's future looks very good. I urge you to consider both Brazil and China for your long-term accounts.

Big Banks Should Continue to Prosper

The rising global economy, the prospect of higher interest rates, President Trump's repeal of several restrictive regulations, and the new tax law all should give our biggest banks a tailwind this year.

Morgan Stanley (MS) appears to be the most attractive major bank. The company exceeded its second-quarter earnings estimates in all its divisions -- and set records in wealth management, one of the brightest stars in global banking today.

Although not all the bank's businesses did well in the second quarter, those that slipped did less so than expected. I think Morgan Stanley will be a good performer in long-term accounts.

A Few High Flyers Also Look Good

My investment priority during corrections and bear markets is to buy high quality blue-chip stocks that are leaders in their industries -- and wait for their stocks to bounce back. However, I frequently have good luck with high flyers that have the potential to rise even more.

Nvidia (NVDA) is one such company. This maker of high-speed image processors is finding applications it never considered when the company was founded. Artificial intelligence, virtual reality, self-driving cars, facial recognition, cryptocurrency processing and several other new technologies all rely upon Nvidia's high-speed chips.

The many new applications for the company's processors should keep Nvidia's high growth rate on track for several years. A recent dip in the stock price due to the market correction makes the company all the more attractive.

Apple (AAPL) should also do very well. I recommended the stock in August 2015 when it was $113.03. At the time, many analysts were saying the company was out of new blockbuster ideas, and would be hard-pressed to hold onto its current profit level -- much less increase it.

Since then, Apple introduced several new products, including the iPhone X, that are finding global success.

This should be a good time to buy Apple. The stock is now around $170, a 50% gain from $113.03. However, Apple is still well below its 52-week high of $183.50.

Varonis Systems (VRNS) : Nearly all cybersecurity companies seek to protect their clients from being hacked by outsiders. However, as any business manager will quickly confirm, employee tampering and theft can also be big problems. For employees in a company's IT department, the potential for criminal behavior is enormous.

Varonis is doing very well in its part of the fast-growing cybersecurity sector. Customers include Coca-Cola (KO) , Miramax, The Boston Globe, Children's Hospital & Health System, Kodak (KODK) , L'Oreal, Regeneron (REGN) , SanDisk, and Toyota (TM) -- to name only a few. Sales have more than doubled from 2014 to 2017. I think Varonis Systems has a bright future.

Final Thoughts: The Wall Street Party Isn't Over

The stock correction that started on Jan. 26 brought the market down 11.6% -- from 26,616 to 23,533 on March 23, 2018. As corrections go, the move was relatively mild. The biggest reason the drop rattled investors is because it was the first real market shock in nearly two years. With any luck, the correction will have further to go.

I recommend using any additional stock market decline as an opportunity to buy more of the high-value stocks that have long histories of riding out storms, and then going on to new highs. Our leading stocks in energy, raw materials and emerging markets look particularly attractive.

I think 2018 will be another good year for knowledgeable investors -- especially for those who buy top-quality stocks when market scares push their prices down.

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