In the world of investing, once a market-beating strategy is known, it tends to get employed to the point where the strategy no longer beats the market.
Case in point? The January Effect. Many analysts noticed that stocks tended to post strong gains in the month of January. To get ahead of the January Effect, they started buying stocks in late December. But that lost its efficacy, so they started buying earlier.
That’s why the January Effect starts right around this time of year. If you’re not buying stocks right after Thanksgiving, you can miss out not only on the January Effect, but what is now a seasonal end-of-year rally dubbed the Santa Claus Rally.
With this end-year rally in mind, chances are stocks that have been going up will continue to do so. And stocks that have been beaten down should get a bit of a breather. As we look to close out the last rally of the year, three oversold blue chips look attractive right now.
The first opportunity is in AT&T (T). The telecom giant’s shares are near a 52-week low amidst a market entering the grips of a mania. Shares have been beaten down due to some headline fears relating to the stock and its attempt to merge with Time Warner (TWX). There’s also ongoing concern about the company’s massive debt load, which could become an even bigger issue following a massive merger (to say nothing of the Department of Justice’s interest in blocking it). As a result, share prices have slumped over 20 percent from their peak, putting the stock into a bear market.
Yet AT&T’s prior mergers have been beneficial to the bottom line, even when accounting for an increased debt load. And more importantly, at today’s prices, shares yield over 5.5 percent. With stocks returning 8 percent per year on average, AT&T doesn’t need to rally much from here. Shares are reasonably valued at 16 times earnings, but with forward earnings at 11, shares look exceptionally valued at or near today’s prices. That’s assuming no merger, and consequently only modest growth at best.
Shares have traded over $42 in the past year and today trade under $33. Any time you can pick up a telecom company with t a yield over 5 percent, you’ll likely end up in great shape. This market has had numerous periods where investors have pushed high yielding stocks higher to grab some income, and AT&T will likely be one stock where investors will do so again.
Another large, blue-chip company that looks attractive right now is media conglomerate The Walt Disney Company (DIS). The House of Mouse has struggled in recent quarters, as its revenue-heavy ESPN division has been in decline. The gradual reduction of cable subscribers, a huge source of cash to the company, has been drying up.
That’s a trend I expect to continue. But it’s no surprise that the company’s strategic acquisitions over the past few years such as Pixar, Marvel, and LucasFilm are all bearing fruit. Disney is churning out several superhero movies each year, and made over $1 billion at the box office with the first Star Wars movie under its helm. The next installment opens in under a month—and will likely show that the company is more than capable of earning great returns outside of its sports cable franchise.
While not quite the yield play as AT&T, Disney yields 1.5 percent, still better than the average bank account. Shares are down over 15 percent from their 52-week high and trade at 15 times forward earnings. That’s a sizeable discount to the 25 times earnings the average S&P 500 stock trades at today. And it’s a good a valuation as any for buying a company with a host of powerful, moneymaking brands.
Finally, one incredibly oversold stock looks so dangerous right now to shareholders that it may provide the most upside among these names in the next few months: General Electric (GE).
The company is in the midst of a turnaround. They’ve spend the past few years shedding the financial divisions that nearly sent the company under during the financial crisis. They’re refocusing to their original core business of industrial manufacturing. As such, the company is shrinking.
That’s got investors worried. Without the high earnings of the financial division (at least in good years), the company’s high debt load led to a 50 percent cut in the company’s quarterly dividend a few weeks back. Shares are down over 41 percent in the past year as a result of these fears.
Yet despite the shrinking nature of the company, it’s still a profitable one. They’re not losing money yet, and will likely continue to finish selling off divisions and using that to put the company’s balance sheet in a stronger position. Paying out less cash in the form of dividends will help as well.
Typically, buying a company before a dividend cut means getting dragged down on the immediate selloff. But buying after a dividend cut, after all the fear gets priced in, often leads to market-beating returns. Even if GE decides to no longer be a going concern and liquidate all its divisions to competitors, all the various parts are worth more than where shares are currently trading. That’s why I see upside. And with shares nearly beaten down by half, the newly halved dividend still gives investors a decent amount of yield to make the trade worthwhile.
If you’re looking for some Black Friday bargains, these stocks just might fit the bill. They’re oversold, unloved, and at least generate some kind of income, unlike most of the goods being bought today. They lack the excitement of a high-flying tech stock, but there are better ways to trade those. For dividend-paying oversold stocks, however, buying and holding until they’re back in the market’s favor can prove accretive over time.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.
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