Why Now is the Best Time to Buy Stocks
If you listen to all the pundits, you would sell all your stocks in anticipation for the historically poor performing month of September. But not me.
Instead, I’d make the contrarian play by owning stocks. Buy on the dips, and get yourself invested in a market that is only now beginning a new up-cycle.
The only real question should be what stocks should I own now?
We have had an impressive run off the bottoms. Leading the way have been the so-called junk stocks. Those stocks that fared the worst during the crisis and rebounded from near-death experiences have seen the biggest gains since March.
Indeed, short covering provided rocket fuel to these struggling companies propelling shares to heights that may or may not be sustainable.
We are now moving to a new phase of the recovery process. The companies that will do the best going forward are those companies with real business models that are generating real profits.
More importantly, investors will likely pay a premium for growth. That means you need to do your buying before prices are bid higher.
Which Stocks to Buy in This Phase of Recovery
After a recession, analyst estimates tend to be too low. With demand lower and companies operating on very tight budgets the spring is coiled for big profit percentage gains. It happens at this stage of every bull cycle.
This time will be no different. In fact, one could argue that given the severity of the recession and crisis, the spring is tightly wound. When uncoiled, watch out.
Don’t be afraid of the big bad wolf that is called the month of September. While it is true that historically stocks do not do well during this month, the more important factor is where we are in the business cycle.
The early stages of that cycle and the benefits that accrue to those willing to get in at this time far outweigh the witches watching the calendar. I prefer to stick to economics and valuation. I want to own growth in September.
Here are five names to consider.
Growth Stock #1 – Arena Resources (ARD)
This one is easy: if you believe oil and natural gas prices are going higher, as I do, then buying Arena Resources (ARD) is a no-brainer.
Like Chesapeake Energy (CHK), one of my Top 10 Stocks for 2009, ARD develops oil and gas properties focusing on Oklahoma, Texas and New Mexico. At the end of last year ARD had proven reserves of approximately 65 million barrels of oil equivalent. At peak oil prices last summer, investors paid more than $50 per share for ARD. Today, you can buy shares for $30.
It is undeniable that oil and gas are finite resources. As such, any growth in demand will be accompanied by increases in price. What has been missing over the last 12 months is global economic strength. But that was yesterday.
Today, we are looking over a horizon that is much more promising. A stronger economy across the planet is likely to result in higher oil and gas prices. $100 per barrel of oil is not out of the question. If that is the case, $50 per share or more is likely for ARD.
Growth Stock #2 – Cubist Pharmaceuticals (CBST)
Biotechnology has been red hot during 2009. The trend will continue in 2010. Typically biotechnology is a play on research and development in hopes of a big payoff down the road. An investment in the space requires a willingness to lose money on an operating basis until a drug hits the market and generates revenue.
In the case of Cubist Pharmaceuticals (CBST), we get research and development, but we also get existing
revenues and profits. Over the last four quarters, the company made $1.23 per share. The estimate for the current fiscal year ending in December is for CBST to make $1.35 per share. That shoots up to $1.65 per share the following year. This company is very unique in the space and thus very attractive.
Larger pharmaceutical companies have to be looking at this company longingly. Could an acquisition be in the cards? Certainly the ingredients are in place, making the stock worthy of buying for that reason alone.
At the current price of $20.21 per share CBST trades for just 12 times 2009 estimated earnings. Growth doesn’t come any cheaper.
Growth Stock #3 – Rick’s Cabaret International (RICK)
If you can get over the idea that Rick’s Cabaret International (RICK) is a purveyor of gentleman’s clubs across the country, the company is a fantastic little money-maker. Even better for investors is that shares are priced quite cheaply today.
Sellers pushed shares of RICK to nearly $2 when the market bottomed in March. The speculation was that a deep recession would negatively impact business, travel and expenses for things like entertainment. Clearly RICK’s is a discretionary spend. Without dollars flowing to the dancers, RICK’s would surely suffer. But that has not been the case, as the company has made good money over the last year.
For the 2009 fiscal year ending September, analysts expect RICK to make 64 cents per share. That is expected to grow to 96 cents in the 2010 fiscal year. You can buy that growth for $7.40 today. Even though the stock has rallied nicely, expected future growth will support a much higher valuation.
Growth Stock #4 – Lululemon Athletica (LULU)
Lululemon Athletica (LULU) is in the business of making and selling athletic apparel. With a wide range of fitness items, the company has managed to navigate the recession in fine form.
Over the last four quarters the company has earned 48 cents per share. For the current fiscal year ending in January, LULU is expected to make 51 cents per share. Analysts expect the company to make 64 cents per share in the following year. Revenues are estimated at $370 million this year and $415 million next year.
Shares of LULU have recovered nearly 100% of the value lost since the start of the credit crisis in November of 2008. Now poised for economic growth, I expect this highly popular brand to explode over the next two years.
While investors today pay a slight premium for that growth, LULU is the kind of company that can easily blow through expectations. What may seem expensive today can look awfully cheap if earnings beat estimates. The emphasis on health and fitness bodes well. If you do buy the stock, you might consider taking a yoga class on one of LULU’s trendy yoga mats.
Growth Stock #5 – Starent Networks Corp. (STAR)
Smartphones are all the rage. With Apple’s iPhone and Research in Motion’s Blackberry, growth in smartphones is likely to follow a trajectory similar to that of the personal computer. In other words, everyone is going to be using one of these things. Starent Networks Corp. (STAR) provides the hardware and software for mobile devices to act smart.
It’s a huge growth area, as evidenced by STAR share price growth over the last year. Unlike most stocks, STAR trades at a price higher than where shares traded prior to the market collapse last fall. That appreciation makes STAR a bit expensive, trading at some 20 times trailing and forward earnings.
The value play currently is in the expectation that earnings are likely to beat expectations. The smartphone phenomenon is going to be bigger than many think justifying paying a higher price for STAR today.
