Finding Stable, Winning Companies In A Chaotic Market


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“If you can keep your head when all about you are losing theirs...” is probably the most quoted line and a half ever written by Rudyard Kipling. It is also something that traders and investors should repeat to themselves on a regular basis. In fact, the whole poem “If...” which can be found here, should probably be required reading before opening an investment account. The advice contained therein is particularly useful at times like this, when volatility abounds.

Whenever such a period ensues I take another meaning from Kipling’s lines and find myself looking for individual stocks that have “kept their head” and shrugged off the general pessimism as others have fallen. This serves two purposes. Firstly it often uncovers a stock with an underlying story of strength that you might otherwise have missed. Secondly, and in a broader sense, it reassures you that the end of the world is not upon us and that the economy is still chugging along with a healthy disregard for the gyrations of the market.

When conventional wisdom tells us that the volatility is led by one or two sectors and examples of counter-trend performance can be found in those very sectors, it is particularly noteworthy. I have seen the last few days referred to as the new “tech wreck,” for example, or led by bio-tech and pharma companies. I happen to disagree with both analyses and believe it is more to do with growth having been overvalued, but even so a tech or pharmaceutical stock that has outperformed should be taken note of. There is one such stock in each sector that stands out, but neither one is an obscure company that is quietly bucking the trend.

In the tech field, take a look at the one month chart for IBM (IBM).

I don’t know about you, but I see no evidence there of a collapse in that particular tech stock. IBM is due to report tomorrow and if, as expected, growth continues, particularly in the middleware and operating systems division that now accounts for over 50% of the company’s revenues, the upward trend is likely to continue. Even with the recent appreciation, IBM is still trading at a trailing P/E of 13.24 and a forward multiple of less than 10.

Despite the challenge for a multi-national company of currency trends, IBM has managed to eke out an EPS beat in each of the last three quarters, but the estimates which were beaten reflected slower growth than one would like. That and the relative devaluing of the dividend (currently 1.9%) as interest rates have fluctuated are probably the reasons for the low multiples, but the strength shown by the stock during the current weakness leads me to conclude that there is still significant upside to come. IBM is not a stock that will rocket upward, but on a trailing P/E basis, just getting halfway toward the 17.61 average for the S&P 500 would give room for roughly a 35-40% increase in the price from here.

In the bio-tech and pharma area, once again, there is an old, staid company that has bucked the recent trend. Many people don’t think of Johnson and Johnson (JNJ) as a drug company, but fundamentally that’s what they are. Okay, it may be stretching it a bit to lump them in with bio-tech, but that is my larger point. The current drop is not universal. It is about a correction in the value of some individual stocks that had overrun somewhat in recent enthusiasm. Related stocks that have done well despite the selloff are worth a look.

JNJ certainly fits that description, having gained around 5% in the last month. This morning’s beat, on both the top and bottom line, and higher FY14 guidance will no doubt result in some more strength, but a solid, if not spectacular year looks likely. JNJ is not cheap at a forward P/E of around 15.47 at yesterday’s close, but nor is it particularly expensive. This morning’s upbeat guidance for the year make the estimates on which that number is based outdated anyway, so that number tells us little right now.

Both IBM and JNJ are examples of stocks that are “keeping their head when all about them are losing theirs.” In both cases that solidity in the face of adversity is likely to presage a good couple of quarters. This is not like investing in the next great thing where you can double your money or more in a couple of weeks or so, but they are both ideas for core holdings that give exposure with limited risk to sectors that are under pressure and could remain so for a while.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
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Martin Tillier

Markets, Bitcoin
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