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What to Buy When Markets Sell Off

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In theory, most of us know that we’re supposed to sell when everyone is buying and buy when they’re selling. At least that’s the way long-term investors are known to trade successfully. Day traders could be doing the opposite: riding the wave in a rising market and cutting losses in a falling one. And there are any number of strategies in between.

But when inflation is not expected to improve anytime soon, when every analyst and his grandmother is telling you that corporate earnings are about to shrink, when your own portfolio size has shrunk perilously, and when gas and supermarket prices are telling you you’ve got to be careful, losing your nerve is natural. But that doesn’t mean you have to give in to the feeling.

There is no one correct way to trade the uncertainty, which is why your personal situation plays a big role. What is the amount you can realistically spare? How long are you prepared to stay invested? Are you in a position to take calculated risk? And so forth.

No matter what answers you gave to the above questions, one factor that should play a role in the selection process is valuation. In a down market, many stocks (even growth stocks) drop below their intrinsic value. So, there’s more to choose from. If the stock you’re watching is still expensive, it may make sense to wait. After all, we’re going to see more rate hikes. And earnings season is likely to be unexciting. So lots of scope for further pushback.

It also doesn’t hurt to select stocks that pay a dividend. Even if you make a mistake in the selection process (as we all do at times), the dividend is kind of like a buffer. Take the cash or re-invest it, depending on your need.

One way to select stocks based on the dividends they yield is by dividing the annual dividend by the price you pay. So, for instance, if you pay $100 for a share and the dividend is $5, you are getting a return of 5/100, i.e. 5%. Naturally, the higher the yield, the more you stand to gain.

Generally, it is the more mature companies that pay a dividend. And that’s the type of company you’d be better off selecting. Because if you’d like your revenue flow to sustain over a longer period, it makes sense to select companies that have been around longer and that therefore have more experience operating in downturns.

They are also likely to be more disciplined in their approach to generating revenues and returning value to shareholders. Here are a couple of examples-

Greif, Inc. (GEF - Free Report) has a Zacks Rank #1 (Strong Buy), and Value, Growth and Momentum Scores of A, B and B, respectively (so good no matter what your risk appetite may be).

The Containers - Paper and Packaging industry to which Greif belongs is in the top 26% of Zacks-classified industries, which increases the possibility of its upside potential. You can see further details about why this industry is so attractive in this article.

Analysts are also optimistic about its prospects, raising their 2022 and 2023 estimates by a respective 17% and 7% in the last 30 days.

The stock trades at 8.04X forward earnings, 0.46X forward sales and a PEG of 0.87. All these numbers compare favorably with the S&P 500 as well as its own median level over the past year. So the shares are rather cheap.

Greif’s dividend yields 3.00%.

Another stock that is looking quite good based on these criteria is Phillips 66 (PSX - Free Report) . The stock carries a Zacks #1 rank and has Value, Growth and Momentum scores of B, A and A, respectively.

There’s a very good reason why the Oil and Gas - Refining and Marketing industry to which it belongs is currently in the top 2% of Zacks-classified industries. Oil prices are still highly elevated.

Although recent gyrations have raised concerns about investing in the sector (because economic downturns usually take oil with it), there is significant unfulfilled demand right now, particularly in Europe. With Russian output on its way out of the mix, OPEC production insufficient to fill the gap and storage for the winter on everybody’s minds, it doesn’t look like demand will drop off any time soon.

Analyst estimate revisions support this thesis. Phillips’ 2022 estimate is on a steady upward trajectory for a combined 45% increase in the last 60 days. The 2023 estimate is moving similarly, up 15%.

The stock trades at a forward P/E of 7.13X, P/S of 0.28X and a PEG of 0.62, all of which are lower than the S&P 500 and the respective median levels over the past year.   

Phillips’ dividend yields 4.88%.

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