Table of Contents
The stock market is near all-time highs, but train-wreck season lies just around the corner.
Should you sell? After all, the S&P 500
and Dow Jones Industrial Average
often hit a rough patch in September and October.
I say hold on, and indeed consider any of the five companies below because they are “smart money” favorites. But first, big picture, here are three reasons to stay the course.
1. There’s no guarantee that the seasonal weakness will repeat. Besides, the ability to time market turns is tough.
2. Fears about the delta variant of Covid are overblown. More people are getting vaccinated, and most of them won’t suffer severe symptoms if infected, say market strategists at T. Rowe Price.
3. There’s a lot of embedded demand in the economy and it will sustain growth, says Leuthold Group strategist Jim Paulsen.
On the consumer front (most of the economy): Personal savings at a record high, durable goods purchases are near a 50-year low, and new household formation is at a record high. People buy stuff to fill new homes. Next, the economy has plenty of room to grow given the elevated jobless rate and big excess lending capacity at banks.
Five smart money stocks
At my stock letter Brush Up on Stocks (the link is in the bio, below), I favor stocks that corporate insiders like. But not just any insiders. I go for stocks picked up by insiders with great records. Here are two, trading near where insiders just bought.
This is the company behind the most popular and addictive online games — like Call of Duty, World of Warcraft, Diablo, Overwatch and Candy Crush. Activision Blizzard
makes money via game sales and subscriptions, by selling in-game content and ads. It has around 408 million regular users.
Besides winning over new fans, the company regularly launches new games and expands existing franchises — most recently with World of Warcraft: The Burning Crusade, in June. This addition marks “the start of what is intended to be a very significant 18-month period for content releases,” says the company. Sales grew 19% to $2.30 billion in the second quarter, and operating margins are rich at 42%.
One risk is that fallout from allegations of sexual misconduct and a related lawsuit by the California Department of Fair Employment and Housing will “make it difficult for the firm to attract and retain top talent in a very competitive industry,” says Morningstar analyst Neil Macker.
The smart money signal: Director Peter Nolan just bought $2 million worth at $80-$82.28 a share. He’s a good insider to follow because he bought $4.3 million in March 2019 at $43 and the stock is now almost a double. Also, in my system of insider analysis, repeat buying on strength (as opposed to profit taking) is bullish. He also bought at $3.70 back in 2004.
B. Riley Financial
I introduced this name in my stock letter in March 2018 at $20 and reiterated it over a dozen times into strength after that. It now trades for over $65. Despite the hefty gains, I think B. Riley Financial
is still a hold, and a buy for anyone who does not own.
This is a Los Angeles-based investment bank that also manages money and does stock research. It specializes in small- and mid-cap stocks. B. Riley Financial is a good proxy for the overall market and the U.S. economy, given its banking and market-related businesses. This will be a plus, as economic growth holds up. It also continues to expand via acquisitions. Revenue grew 26% in the second quarter to $336.8 million, in part because of an acquisition. It pays a 2.9% dividend yield.
The smart money signal: CEO Bryant Riley purchased $3.4 million worth of stock at $63 to $68 in early June and August. He has a long record of buying over $22 million worth of stock in the $8 to $48 range since 2014, including $6.6 million in purchases near the start of this year at $46 to $48.71 (already up over 40%).
If you like to buy quality companies whose stocks are beaten down by a host of problems, then Chinese consumer platform Alibaba Group
may be for you.
Its shares are down 40% since October because of rising U.S.-China tensions, some weakness in its core consumer business, the possible loss of tax breaks in China, and allegations of sexual assault inside the company.
These are serious issues, but this is also a company with serious potential. Over one billion consumers use its marketplaces, including 891 million in China and 240 million abroad. Organic sales growth is 32%. It’s in the early stages of rolling out its AliCloud cloud computing business, which could be the next big growth driver.
The smart money signal: This company is singled out by Albert Meyer of Bastiat Capital, which has posted 22% annualized growth over the past five years compared to 17.7% for the S&P 500.
An attractive spinoff
One tactic that works fairly consistently in investing is buying spinoffs. Companies don’t like to burn shareholders, so they tend to do spinoffs at a discount, as a kind of “gift.” Money managers who get spun-off shares often dump them anyway, because the new company does not fit their mandate.
A good spinoff to consider right now is Organon
a mid-size pharma company. It was jettisoned from Merck
in May. Organon just bounced 12% on Aug. 12 after it posted a solid quarter, but it still trades below the spinoff price of around $38. At this level, the stock looks attractively cheap, trading near five times 2021 earnings.
Of course, Organon is cheap because it has issues. The chief one is the looming patent cliff on many of its products. Its Nexplanon birth control rolls off patent during 2025-2027, and that’s 11% of sales.
But this might not be such a threat. “There is a strong possibility that it can extend its patent to as late as 2030,” says Bruce Kaser, a value investor who is the editor of the Cabot Turnaround Letter. Nexplanon is a rod implanted under the skin, so women may be reluctant to go with a discount version. Another problem: Organon sells into China, where the government is cutting the prices of its products. But the worst of the damage may be over.
On the upside, Organon plans to regularly launch new products. And the company has $1.3 billion in annual free cash flow supporting a dividend yield of 3.3%.
The smart money signal: Organon was recently suggested in the Cabot Turnaround Letter, which has a good record. Its portfolio is up 135.8% in the past 12 months, compared with 36.5% for S&P 500.
An education play
If universities have allowed their participation in the culture wars to distract them from the core mission of basic education, Chegg
is there to pick up the slack.
This online education company helps college and high school students master their math and writing skills. The company also helps students save on expensive text books by offering rentals and e-textbook versions.
While online education has a black eye, Chegg is the exception. Last year student subscriptions jumped 67% to 6.6 million from a year earlier. Sales grew 30% in the quarter, and the company guided to 28% sales growth for this year, to $805 million to $815 million.
“Online learning had a bad reputation for overcharging, while success rates were minimal,” says money manager Kevin Landis. “But Chegg is different.”
He likes the robust growth in the U.S. and the big potential for international growth, particularly in Asia.
The smart money signal: Landis’ Firsthand Technology Opportunities
beats its Morningstar technology fund category by eight percentage points annualized over the past five years. Chegg is the second-largest position, at 8% of the portfolio. Chegg is the sixth-biggest holding of the Alger Weatherbie Specialized Growth Fund
which beats its mid-cap growth category by 5.7 percentage points annualized over the past five years.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned RILY. Brush has suggested ATVI and RILY in his stock newsletter, Brush Up on Stocks. Meyer subscribes to Brush Up on Stocks. Follow Brush on Twitter @mbrushstocks.