What are we looking for?
The SPDR S&P 500 ETF Trust (SPY) dropped more than 35 per cent since February’s record high before posting a 15 per cent short-term rebound this week.
So, is this the time to buy? No one knows. But it is a good time to have a strategy in place and stick to it. If you are a bullish long term investor, accumulating quality companies in small increments as the market attempts to find a bottom may be a great opportunity, but be prepared for the possibility of further declines and increased volatility.
For those who are comfortable with volatility, here are a few U.S. stocks our research team in Ottawa has found when applying a “bottom feeder” strategy.
We will be using Trading Central Strategy Builder to search for U.S.-listed stocks that have positive cash-flow growth in order to weather this current storm. We want companies that pay us a dividend so we can be paid to wait if the markets continue to decline. A bottom-feeder strategy looks for companies that have declined a substantial amount but remain top quality, so we will apply a price-performance filter to look for companies with a market capitalization of at least US$5-billion that have declined at least 30 per cent year to date. Finally, we are screening for stocks with a price-to-earnings ratio well below the S&P 500 average of 16.9.
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What we found
Numerous financial stocks emerged in the screen; there is no doubt financial companies are in a better financial position when compared with the 2008 financial crisis. Topping our list is Carlyle Group Inc., one of the largest firms of its kind, with more than US$220-billion in assets under management. The company invests in real estate, infrastructure and distressed assets, just to name a few areas. Its stock has rallied more than 130 per cent since its lows in December, 2018, and was in a well-defined uptrend before news of the coronavirus. Carlyle shares fell 50 per cent this year before posting a rebound this week for a year-to-date decline of 30.1 per cent.
Next on our list is Canadian Imperial Bank of Commerce, which, of course, also trades on the Toronto Stock Exchange. Its shares have declined more than 31 per cent year to date. CIBC has the highest dividend yield on our list at 7.7 per cent, making it a viable holding for those looking to be paid to wait for a rebound.
Ten more stocks round out our bottom-up strategy. While this may be a difficult time to apply any strategy as global markets remain highly volatile, it’s a great time to build up a shopping list of top quality companies trading at a discount.
Does “no pain, no gain” apply to equity investing during these volatile times? I leave you with a quote attributed to economist John Maynard Keynes that stuck with me through the 2008 financial crisis and a few flash crashes in my career: “The market can remain irrational longer than you can remain solvent.”
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.
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