Investors were given a rude awakening by the sharp drop in stock prices in the first three weeks of the year. The decline is not so surprising, however, given the large returns in 2021 and the ongoing speculation in many sectors. We’ve seen massive bounties in hyper-growth stocks without profits, speculation in electric vehicle-related stocks (the market capitalization of the top ten auto manufacturing companies has nearly tripled in the past two years), the rise of crypto -currencies, NFTs, SPACs, etc. They were all signs of an overheated market. The immediate cause of the market drop is the prospect of Federal Reserve tightening in light of higher-than-expected inflation. But in any case, it was a situation ripe for a step back.
So is it too early to start buying? I see the headline in this week’s Barron’s Magazine: “Time to Bargain Hunt”. Friday night I saw investors like Karen Finerman add positions to Netflix. CNBC’s Jim Cramer is also starting to buy. He also pointed to the reasonable valuations of companies such as Goldman Sachs, JPMorgan, Alphabet, Meta Platforms, etc.
My feeling is that it’s still too early to make major purchases, but it’s not too early to make a list of things to buy. I do not take the inflation situation without some reasonable concern. I’m old enough to remember the inflation of the mid to late 1970s when inflation rates hit the 10-15% level. The history of inflation in the late 1970s left me with vivid memories. I had just taken my first job at BF Goodrich in 1980. At that time, Goodrich was a major PVC producer. The company, on the advice of McKinsey Consulting, decided on a very aggressive growth plan for PVC, adding a new large manufacturing facility in Louisiana. But that plan was destroyed when Federal Reserve Chairman Paul Volcker raised rates sharply to fight inflation. These rates have killed the housing industry and destroyed demand for PVC. The result was heavy layoffs at Goodrich. I kept my job but saw others lose theirs. I don’t think current inflation will reach 1970s levels. But I’m watching closely. Inflation is difficult to eliminate. A significant tightening by the Fed could lead to a recession, causing the market to decline further. So I watch inflation with considerable concern, but I’m not in the Jeremy Grantham “disaster is coming” camp. It is also good to remember that in a strongly rising market, prices often fall to unjustifiable levels depending on the probable future prospects.
In this context, what should be put on a stock buy list? My long investing experience (1982 to present) tells me that often the best things to buy in an overall market downturn are the stocks you already own.
Here is my shopping list: Note that target prices are where I would start making new purchases. All of the companies below have a solid track record of real and rising financial values (sales, earnings, cash flow). All of these companies have strong balance sheets that would allow them to survive a recession. I usually add over a period of time, but would be more aggressive on very steep price declines.
alphabetical (GOOG), current price $2602, target price $2400. GOOG is currently my largest participation. I’ve owned the stock since 2011. The target of 2400 represents a forward p/e of around 19.8.
Microsoft (MSFT), current price $296, target price $250. I have owned the stock since 2006. The target price represents a forward p/e of 27.6.
Accenture (ACN), current price $336, target price $275. I have owned the stock since 2006. The target price represents a forward p/e of 27.
Blackstone (BX), current price $110, target price $75. The target price represents a forward p/e of 18.75. I have owned the stock since 2017.
Home Depot (HD), current price $349, target price $300. The target price represents a forward p/e of 18.75. I have owned the stock since 2016.
Danaher (DHR), current price $280, target price $240. The target price represents a forward p/e of 24. I have owned the stock since 2008.
TJX Companies (TJX), current price $67.5, target price $60. The target price represents a forward p/e of 18.5. I have owned the stock since 2014.
Linde (LIN), current price $316, target price $275. The target price represents a forward p/e of 23.5. I have owned the stock since 2013.
Visa (V), current price $206, target price $180. The target price represents a forward p/e of 24.8. I have owned the stock since 2011.
Teledyne (TDY), current price $414, target price $375. The target price represents a forward p/e of 20.3. I have owned the stock since 2008.
Black Rock (BLK), current price $801, target price $700. The target price represents a forward p/e of 16.5. I have owned the stock since 2010.
Pacific Airport Group (PAC), current price $136, target price $100. The target price represents a forward p/e of 15.3. I have owned the stock since 2014.
As you can see, I’m a long-term holder of all of these stocks. Any new purchase would be made with the intention of keeping it for the long term (5-10 years or more).
There are many other high quality issues in my wallets that I would consider for further purchases, especially during very steep price drops. But the list above is the one I would probably add first.