The Best Values I See In This Beaten Down Market

Nicholas Ward

I’d be lying to you if I said that I was sitting on my couch Monday as the DOW was down more than 1000 points feeling great about myself and my portfolio. I wasn’t sitting there shaking with fear by any means, but it’s never fun to think about the thousands of dollars being erased from your account in a matter of minutes (or the trillion plus dollars being wiped away from the global equity market in a couple of market sessions).

My wife happened to call me around 3:15, right during the worst of the sell-off, and looking back at my phone records, that call lasted just 15 seconds. I answered. She said, “Hello, how are you?” I responded, “Not good, the market is crashing.” And knowing that my work revolves around the markets, she said, “Okay, talk to you later.”

I called her back 24 minutes later after the DOW had bounced back from the lows to explain what was going on. She had already checked the news on her phone and didn’t blame me. While we talked I was frantically pouring through my watch lists, hoping to find names that had sold off irrationally low. For a split second, NVIDIA (NVDA) was down more than 12% and Johnson and Johnson (JNJ) was down something like 10%. Both of these caught my eye.

However, I decided to sit tight; I had already bought shares of Gramercy Property Trust prior to the big 1600-point drop and I didn’t want to deploy too much capital in a single session, to matter how deeply into the red it sunk.

Before the bell I did add to my biggest position: Apple (AAPL); buying some shares at $157.00. Apple bounced off the 200 day moving average strongly in the morning so I decided to play the technical support late in the session. Fundamentally, Apple is trading for ~13.5x forward earnings estimates at $157. To me, this is more than fair.

What’s more, I fully expect Tim Cook & Co. to take advantage of any market weakness with their enormous buyback moving forward. Heck, if things really fall apart maybe we will see AAPL putting that repatriated cash to work in M&A rather than buybacks…can you say Disney or Netflix on weakness, anyone? Either way, Apple’s cash gives it a lot of flexibility moving forward and I view it as a fairly defensive company in today’s market.

Later in the afternoon, another buddy one mine who has been lamenting the fact that he’s avoided putting money to work in the markets for about 24 months now because of perceived risk texted, asking how far I thought the market was going to go. I knew he’d been kicking himself for missing so much of the recent upside and I told him I thought this would probably be a good opportunity for him to start averaging in.

“The market could definitely sink another 5-10% in the coming days,” I said, “but ultimately, I think this is driven by algos and I wouldn’t be surprised to see a bounce soon.”

If I had to guess, I’d say that the strong underlying fundamentals of the market (it’s cheaper now than it was in any point during 2017 due to rising earnings estimates pushed forward by the tax reform tailwind). We’re already seeing impressive GDP data in terms of economic growth. Unemployment is continuing to fall and wages are edging slightly higher. Granted, tax reform shouldn’t be viewed as an economic panacea; many analysts expect it to significantly increase the U.S. debt load and in a rising rate environment, servicing this debt could potentially put a hamper on economic enthusiasm.

The funny thing about this sell-off (if there is anything funny about trillions of dollars of wealth being erased globally) is that there wasn’t the tell tale “black swan” type of event that sparked it. Earnings, for the most part, have been above expectations. We’re seeing political conflict in Washington D.C. but that’s been a consistent occurrence since the election of our current POTUS. If anything, geopolitical issues seem to be cooling off. Davos went well by all accounts and the Winter Olympics are just around the corner and seem to be a unifying force.

Really, this sell-off seems to have spawned from Friday’s wage inflation figure and the rise in the 10-year rising to ~2.8%. However, it’s difficult to say that this is all about interest rates because rates have fallen a bit this week and this didn’t have a positive effect on equity prices. At this point it should be clear to the FED that rising rates are damaging to the markets and while I still expect to see normalization continuing, I wouldn’t be surprised if we only saw 2-3 increases in 2018 when just a week ago I was leaning more towards 4.

It’s amazing to me how quickly sentiment shifted from exuberance with regard to Amazon’s fabulous quarter and fundamental growth across the board late last week, to panic selling with blood in the streets. We’re gone from synchronistic global growth to pain in markets in every corner of the world. I’m hearing phrases like, “forced mechanical selling”, referring to computers who’re focused entirely too much on the technical, going berserk.

I’ve been saying that there are expensive areas in this market for awhile now, but I think the pace and breadth of this sell-off point towards irrational fear more than anything else. There are certainly babies being thrown out with the bath water and in this piece I’ll be highlighting my favorite individual names and the value the represent after the market’s big dip.

When volatility rears its ugly head, I tend to revert to my conservative DGI roots, focusing on sustainable, above average yields. This leads me to a handful of companies trading down double digits from recent highs.

Big Pharma:

A handful of the more recognizable healthcare names were hurt badly during this sell-off. I find Pfizer (PFE), Merck (MRK), Bristol-Myers Squibb (BMY), and Johnson and Johnson (JNJ) to be attractive after their recent weakness. Sure, these companies are still facing legislative risks as the legislators in our nation’s capital try to revamp our healthcare system. The President spoke about expensive drug prices in his State of the Union address recently as well, which doesn’t bode well for the big players in the sector. However, all of these risks require healthcare overhaul/policy changes and it’s been very difficult for any deals to get done in Washington and I have a hard time believing that Republicans and Democrats will come to some sort of healthcare agreement anytime soon. It’s also worth noting that the healthcare lobby is a very powerful one; I don’t know what’s best for the country in terms of healthcare, but as a shareholder of each of these names, I feel somewhat secure because I’m sure their interests will be well considered on Capital Hill.

Pfizer is trading for 11.9x 2018 earnings expectations and yielding nearly 4%. Merck is trading for 13.4x 2018 earnings expectations and yielding ~3.5%. Bristol-Myers is trading for 18.5x 2018 earnings expectations and yielding ~2.6%. And, Johnson and Johnson is trading for 16.2x 2018 earnings expectations and yielding ~2.6%.

I have large positions in each one of these companies and don’t feel compelled to add to them quite yet. However, for investors looking to put new capital to work on the dip, I think these companies are worth looking into.


Blackrock (BLK) is one of my favorite financial stocks. BLK is the largest asset manager in the world with over $6T in AUM. This stock doesn’t experience weakness very often, but currently finds itself trading down more than 11% from its 52-week high. BLK is trading for 18.4x 2018 EPS estimates and sports a ~2.2% dividend yield. BLK ‘s 5 year DGR is 10.76%. To me this is an easy financial to buy and hold and if you don’t already own it, take some time and do a little due diligence of your own. I think you’ll like what you see.

Apple, Microsoft, and NVIDIA:

Apple is my largest position and I added to it again on Monday before the bell at $157.00. At these levels APPL is trading for ~13.5x 2018 EPS expectations, yielding 1.6%, and coming into a quarter where management will discuss the capital allocation of its ~$270b cash pile. I’m expecting to see an enormous buyback as well as a double digit dividend increase. Apple’s cash makes it one of my favorite defensive positions and I felt very comfortable adding to it down ~13% from recent highs.

Microsoft (MSFT) has established itself as a world leader in the fast growth cloud space. This company is fairly unique in the fact that its one of the old guard cash cow tech companies with a strong dividend yield, but offers investors world class growth as well. Apple has gone on a fantastic run in recent months, trading from ~$80 to nearly $100 during the last quarter alone. Microsoft is up more than 40% from its 52-week low and hasn’t had much weakness in recent years now that CEO Satya Nadella has his company firing on all cylinders. Well, this sell-off has pushed MSFT shares down more than 8%. MSFT is one of my favorite DGI companies to hold for the long-term. It doesn’t have as much cash as Apple on hand, but it remains one of the richest companies in the world and if you follow me writing at all, you know I’m attracted to cash cows. I haven’t bought any shares on this dip yet, but I may well do so before the day/week is over.

NVIDIA (NVDA) is a somewhat speculative growth company, but it’s one of my favorites. I recently highlighted it as one of my top-3 growth names for DGI investors to own. This stock isn’t for the faint of heart, but it’s a leader in the AI industry which could turn out to be the biggest growth market of the coming decade(S). Prior to the recent sell-off, NVDA was up more than 20% YTD. Shares have traded down to $209 from $249 in the last couple of days and if this sell-off continues, I will strongly consider adding to my position.


Rising interest rates is what many believe sparked this sell-off in the first place and the REIT sector has problem been hit the hardest. I bought shares of Realty Income (O) at $51.09 and Gramercy Property Trust (GPT) at $24.01 in recent days. I’m closely watching a handful of REITs at the moment. They say that you should buy stocks when there is blood on the streets and the streets of REITdom are running red. I’m looking at adding to O, National Retail Properties (NNN), W.P. Carey (WPC), STORE Capital (STOR), Ventas (VTR), STAG Industrial (STAG), and Federal Realty Investment Trust (FRT) right now. There are a handful of higher yielding names in the space that look interesting to me, but for the time being, I’m targeting best in breed companies with well covered dividends (I don’t think there is any need to take speculative risks in the REIT space with so many of the quality names experiencing weakness recently).

Emerging Markets:

And lastly, I’m looking at the iShares Emerging Markets MSCI ETF (EEM). Emerging markets are cheaper than developed markets with a higher growth outlook. The EEM yields nearly 2% at the moment, giving me some income while I wait for this growth to come to fruition. EEM went on a massive run last year, but emerging markets still have a good deal of catching up to do relative to U.S. and European market performance in the last 5 years or so. This is a bit of a reversion to the mean play. What’s more, it wasn’t long ago that EEM was trading at its most overbought level since 2014, but recent weakness has resulted in the lowest RSI that we’ve seen in two years. This was such a swift move that I can’t imagine that it was completely rational. EEM is down ~8% from recent highs and if it continues to fall I’ll likely be a buyer.

disclosure: I am long O, GPT, NNN, WPC, VTR, NVDA, MSFT, AAPL, BMY, PFE, MRK, JNJ, and BLK.

Comments (2)
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Nicholas Ward
Nicholas Ward


Yeah, I made some moves. I actually post all of my trades in the conversation section of the "Portfolio Management" tab here at IMM. Let's the top of my head: I know I added to AAPL around $157, I sold SJM at $124 or so and used the proceeds to buy $O. I also initiated GPT in the REIT space at $24. I sold HSY around $100 and NSRGY around $82; I wrote a piece here about why I'm selling some of my low growth consumer staples names. I took profits on a trade I had on with BMY to bolster cash position. I added to WPC near 52 week lows. Oh, and I sold HASI and OHI due to dividend freezes (both companies don't plan on increasing their dividend for the next year (at least) and I wasn't interested in owning names, regardless of their yields, if they weren't growing. I'm taking a close look at several other REIT names as well as GIS, which caught my eye with the Blue Buffalo purchase the other day. I'm hesitant to reduce my cash position much further though because the steed of this recover has surprised me and I wouldn't be surprised to see the market experience further volatility/re-test the lows. I plan on talking about all of these trades in more detail the monthly portfolio update that I'll publish in the coming days.


Have you made any purchases since the downturn began? It appears that the worst might be over.

Portfolio Management