The psychology of investing has as much to do with the price of the stock that you pay as the company itself.
It's no secret that the market has suddenly turned nasty after a big run. It's also no shocker that so many stocks are so close to their highs that you may feel like a chump if you pick one up that's fractions off its all time or 52 week high.
So as a teaching lesson let's consider the case of what would be the best odds on favorites to start a new position in the Dow Jones average.
The best performer so far this year is Apple (AAPL) and it is up 39% while off about 3% from its high. While that might be tempting, we are back in hostage land with Chinese trade so I am going to say own it but don't trade it, in this case meaning, don't start a new position at this level. I don't believe that talks are going magically so I don't want to pick this particular spot to make a stand. Let it come in.
Next is Microsoft (MSFT) , up 37% and down 2% from its high. To me that's just plain edgeless. Too close to its high. No compelling reason to pick it up here.
Procter & Gamble (PG) , up 37%, is at its all-time high. Many would be tempted at such strength. To me it is an accident waiting to happen. You buy it here, it drops two points and you will be frozen and talking about how you top-ticked it. Remember what I said about psychology. It's vital to never feel like you have come in at the top after a big run. That makes you way too vulnerable to disappointment.
Same thing with Home Depot (HD) , up 33%. It's right at the top. We get one nasty note and this thing's down three. While I am a huge believer in the Depot, as I am in all of the WATCH stocks - Walmart (WMT) , Amazon (AMZN) , Target (TGT) , Costco (COST) and Depot, it's just too darned close to the high.
Which brings us to the first idea that works for me: Visa (V) , with a stock that's down 6% from its recent high. Here's a high quality company that's part of the fintech cohort that's well-run, that is slated from every bit of research that I have heard, is having an excellent quarter. There has been a rotation back into the big banks but as we get closer to earnings season the money, I believe, will flow back to fintech of which Visa is the most evident. I love situations like this. What a great spot to start.
United Technologies (UTX) , with a stock that's up 29%, is the next ideal selection. It's off 5% despite what is increasingly looking like a brilliant move to merge with Raytheon (RTN) and then split into new companies. I do not know if you have watched how well this stock has held up but you can see the market is loving the prospect of a new aerospace and defense company that's NOT Boeing (BA) . I would buy it right here.
It's filled with positive catalysts, especially with this powder keg of a world we find ourselves in.
Not much to do with Walmart, which while up 27%, is off 1% from its high. Might as well be Home Depot. IBM (IBM) down 6% from its high but up 26% for the year is very tricky. No edge that I can see. Nike (NKE) just blew it out; let's have it come in.
But the final one American Express (AXP) ? I think this is a terrific situation. You just got a 10% dividend boost and a buyback of 120 million shares. The company has 829 million shares outstanding so that's a real buyback. It's a fintech play that is also levered to small and medium sized businesses. Fourteen times earnings. Down 8% from its high.
Now that's an ideal start to what could be a terrific position.
(Apple, Microsoft, Home Depot and Amazon are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
