Friday, August 05, 2011

Time To Take Out Your Shopping List

The Dow lost almost 513 points Thursday. Since July 21, it is down 1,356 points, or 11%. In the few months, I have mentioned several companies that had solid fundamentals but their stock prices seemed high. I suggested that it might be worth looking at them if the market cratered during the debt-ceiling negotiations. Which of these look good to buy now?

Before getting into this, I think it's worth pointing out that the explanations for why the market has fallen are mostly hogwash. The most common one is recession fears. But if that were true, it seems likely that stocks would have plunged on July 29 -- the day the Commerce Department reported 0.4% first quarter 2011 GDP growth and much lower than expected 1.3% GDP growth in the second quarter.

To understand what moves stocks, investors need to know who is making the big buying and selling decisions and why. The general public has no information about that so reporters talk to traders or analysts who make content-free comments the pithiest of which end up as the headlines.

One source of insight is tracking money flows. And for that, it is worth pointing out that investors are craving safety -- it's just not clear why. Between January 1, 2011 and July 20th, cash in commercial banks rose 85% to $1.98 trillion.

And the appetite for safety is so high that one bank is charging big depositors interest to store their money. That's right -- instead of paying interest, Bank of New York Mellon (NYSE: BK) is charging a fee of 13 basis points (1% = 100 basis points) to take deposits over $50 million, according to the New York Times

So what should be on your shopping list now that stocks have taken a tumble? Over the last few months, I have highlighted at least eight companies that looked good at a lower price. Here are the companies along with the day I wrote about them, their stock price and Price-Earnings-to-Growth Ratios (where 1.0 is considered fair value):
Of these, the top three -- ranked based on low PEG ratios are as follows. I have listed their PEG ratios, their current P/E and 2012 earnings growth forecast, and the percentage change in their PEG since I wrote about them:
  • MicroStrategy (NASDAQ: MSTR). 0.62 (down 32%) on a P/E of 53.53 with earnings forecast to grow 87% in 2012.
  • Visa (NYSE: V). 1.10 (down 12%) on a P/E of 17.2 with earnings forecast to grow 15.7% in 2012.
  • Starbucks (NASDAQ: SBUX). 1.16 (down 6%) on a P/E of 24.9 with earnings forecast to grow 20% in 2012.
With July 2011 jobs numbers coming in better than expected – 117,000 jobs beating expectations by 30% -- the stock plunge could subside so now might be a good chance to buy.


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