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If you're a disciplined investor, you're supposed to take a pass when shares get so expensive that price becomes a major source of risk. Stocks with higher P/E ratios do go down harder when the company, the economy or the market disappoints. Investors who pony up for a higher P/E ratio pay for perfection -- and they sell when they don't get it.
Monsanto shares fell hard when they finally cracked along with the rest of the market. The company's shares had tumbled 18.1% by the Jan. 22 close from their Jan. 14 high of $127. Because Monsanto had climbed so strongly even after the market went into decline after Oct. 9, even on Jan. 22 the shares were still way above my definition of reasonably priced. (Monsanto never gets cheap, it seems.) At $104 on Jan. 22, they were still well above the $90-a-share price I had passed on at the market top.
But I can dream. I would love to add Monsanto to my portfolio at a reasonable price. Same is true of Chevron. These two stocks are both part of my 10 best stocks to buy after the bloodbath.
Here are all 10, with a brief explanation of why they belong on the list. (You'll notice that there are no financials on the list -- the specific problems of that sector need a column of their own.)
- Chevron. The company began production from its Tengiz project in late 2007, and it will begin production from Blind Faith in the Gulf of Mexico and Agbami in Nigeria in 2008, and from its deep-water Tahiti project in the Gulf of Mexico in 2009.
- BNSF Railway (BNI, news, msgs). The railroad is best-positioned to profit from the boom in the U.S. coal and farm sectors.
- First Solar (FSLR, news, msgs). The company is a leader in thin-film technologies that promise to dramatically reduce the cost of solar-generated electricity.
- Flowserve (FLS, news, msgs). This maker of valves and pumps sits in the middle of the global infrastructure boom.
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- Middleby (MIDD, news, msgs). The midsize company is the leader in the market for restaurant and fast-food equipment.
- Monsanto. The company projects that its DeKalb corn seed line will gain 2 to 3 percentage points of market share in 2008.
- Potash of Saskatchewan (POT, news, msgs). On its Jan. 24 conference call, this fertilizer company said -- and I've listened to this twice -- that no company in the world will be more profitable over the next five years.
- Schlumberger (SLB, news, msgs). The technology leader in the oil-and-gas-services sector is doing more business as national oil companies lock out Western oil producers.
- Waters (WAT, news, msgs). Here's a way to ride worries about impurities and toxins in our food and drug supplies. Waters is a leader in the fast-growing market for analytical instruments used in research and quality control by everybody from generic drug makers to food producers. The company posted 20% revenue growth in its most recent year for its main product lines.
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Jubak's Journal: Market has further to fallThe Dow’s big rebound Jan. 23 appears to have been set off by computer trades: After stocks fell, large funds wound up with too much money in bonds and had to re-balance. So the wild swing was probably not a sign that the market has bottomed out, MSN Money's Jim Jubak says.
OK, so now what do you do with this list?
First, use it to guide your bear market selling strategy. If you want to add Schlumberger, for example, do you really need to also own CGG Veritas (CGV, news, msgs), for example? Sell stocks into any rally to create capital for future buys and to keep your portfolio balanced.
- Talk back: What's your dream buy list right now?
Second, use it to develop a disciplined approach to re-balancing the stocks that you already own that are on this list. One method I recommend -- and use myself -- is to set a dollar limit for each position as a percentage of your portfolio. For example: Say you have a $100,000 portfolio of 10 stocks with $10,000 in each position. In a rally, the whole portfolio goes up to $120,000, so a 10% position is now worth $12,000. But one stock has really run away, and that position is now worth $16,000. At that point, sell enough shares to trim it back to $12,000.
When a stock drops, put new money to work to bring it up to its correct share of the portfolio. This gives you a kind of dollar-cost averaging that will work to lower the cost basis of positions.
And third, use this method to keep your mind in the game by researching these stocks and their potential for long-term profit. A list like this can help you avoid getting panicked by a bear market. I'm going to do my own version of this therapy in the form of message-board posts that attempt to set a buying price for each of these and a table that attempts to track each stock's progress toward that price. I hope you'll participate -- and suggest other stocks that are on your buy list for after the bloodbath.
Continued: Updates to Jubak's Picks
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