Rotating Into Blue Chips

In Tuesday's column we noted the recent underperformance of risk on sectors and stocks in the past week or so. We then postulated that the increased volatility in the space is likely to last for a while in front of the upcoming third-quarter earnings season, as well the cessation of the latest, and hopefully last, quantitative-easing program by the Federal Reserve in October. Finally, I reached the conclusion that investors should rotate into blue-chip stocks selling at valuations that are more reasonable until the market confirms it can prosper without the same degree of largesse from the Fed and equities can power through decisively what is proving to be a stubborn resistance level of 2,000 on the S&P 500. Today we will look at a few attractively priced large-cap stocks that I would be adding to during any decent dips in the market; of which I believe we get at least a couple in the months ahead. Devon Energy (DVN) has been caught in the same downdraft that overtaken much of exploration-and-production sector over the summer as oil and natural gas prices declined. However, winter season is approaching and it appears it will be colder than usual again in the back months of 2014. E&P stocks have demonstrated considerable strength when the country is in the deep-freeze, as energy prices tend to rise and the area is the recipient of improved investor sentiment. The stock also looks to be trying to establish a technical resistance level at $70 per share, which is down some $10 per share since its highs earlier this summer. Devon continues to execute against its plans to become oily and is showing solid production growth. Earnings are tracking to around a 30% year-over-gain in 2014 and another 10% to 15% boost is the current consensus for 2015. The stock goes for less than 11.5x next year's projected earnings and provides a small dividend yield as well. I am adding a few shares every time this mid-major touches $70. I also will continue to add to my stake in Micron Technologies (MU) any time it dips to $30 per share, a level it is has already bounced off a few times. After a huge run over the previous 12 months, the stock has spent most of the summer trading in a range of $30 to $34 a share. There seems to be some concern that capacity is being added too fast to the DRAM market. This has proven to be a significant headwind this summer. I believe the concerns are overblown, though. The industry did not suffer years of painful consolidation to be dominated by three major players just to lose pricing discipline so soon since becoming an oligopoly. The shares are cheap at 10x this year's earnings and the stock has a five-year projected PEG ratio below 1.0 (0.61). Finally, we have Gilead Sciences (GILD), the biggest position in my portfolio. The shares have had a big run since all biotech stocks had a hiccup in early March. Revenues and earnings have exploded this year on the back of its blockbuster hepatitis C product Sovaldi. The stock has traded in a range of $100 to $110 a share over the past month, and I believe this is just a short consolidation phase before the shares head higher. I am a buyer of additional shares any time the stock touches $100 per share. Even after a great performance in 2014, the stock is still cheap at just over 12x this year's earnings and the company is tracking to almost quadrupling profits this year. Earnings growth should slow to just 15% to 20% in 2015. Sovaldi still has new major markets to penetrate, like Japan. The other drugs in Gilead's stable, including its market-share-leading HIV franchise, are growing revenues about 10% annually. The company has a strong pipeline and should throw off at least $10 billion in free cash flow in 2015. This stock should not be selling at a discount to overall market multiple.

Rotating Into Blue Chips

Three attractively priced large-caps I would add on a dip.

Columnist Conversation

This Weekend on Real Money

Friday Morning Fibocall for 1/22/2021

Worst Stocks to Buy for the Biden Presidency

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.