Where Are the Best Bargains Now?

Morningstar's stock analysts are spying bargains amid the recent market volatility, judging from the number of newly minted stocks with  Morningstar Ratings of 5 stars. Are Morningstar.com Discuss forum participants also finding securities to buy among the market's wreckage? I recently posed that question in the "HandsOn" forum.

Not surprisingly, given the diversity of investment philosophies espoused by Morningstar.com users, posters were divided about what types of securities appear most attractive at this juncture. Among those buying, blue-chip names received multiple mentions, while other posters opined that the broad market is on sale. Still other posters dispute the notion that the market is a buy at these levels, arguing that there's more pain on the way. To read the complete thread or join the conversation, click here.

A Buying Opportunity in the Blue Chips
Many posters who are buying are spotting the best opportunities in the realm of blue-chip stocks.

DCV170 laid out the case for the blue chips with this posting, "I cannot fathom why the market dropped so much. The second round of quantitative easing still doesn't seem like it's priced into the market. Many companies are still undervalued. It seems that most folks are ignoring earnings reports. One must remember that most of the giant-cap companies are raking in the cash from overseas growth in spite of our laggard economy."

Duanej also thinks the recent sell-off has created a buying opportunity for large-cap investors, writing, "Anyone with a horizon of 10-plus years should be buying stocks today. There are decent values in lots of places.  Berkshire Hathaway (BRK.A) (BRK.B) trades only slightly above its book value.  ExxonMobil (XOM) shares trade at 8 times forward earnings, a valuation that is effectively discounting a recession.  Disney (DIS) trades at 11 times next years' earnings estimate. One can find many more reasonable stocks with little effort."

Defensive sectors such as health care and consumer staples received repeat mentions, with posters opining that such names will fare the best in a period of sustained economic weakness.

Rohit33410 wrote, "I believe we still need to be defensive in case the economy goes into a second dip. As such, defensive dividend payers like pharmaceuticals ( Abbott Laboratories (ABT),  Johnson & Johnson (JNJ)), certain consumer stocks ( Altria Group (MO),  PepsiCo (PEP)) and some utilities look attractive as they provide income and are reasonably valued."

Big Pharma and consumer stocks are also on the radar of poster Weiwentg, who wrote, "Health care in general is a bargain--I like Johnson and Johnson and Abbott in particular, though. I like  Procter and Gamble (PG) in consumer defensives."

Shipmad, too, likes Abbott (as do Morningstar's stock analysts) and has viewed the recent sell-off as a time to reduce his average cost basis: "I'm long on Abbott and accumulating on dips into the mid to high $40s. Not very original, I know, but I really like this company; it may arguably be the best of the Big Pharma group."

Poster FidlStix also thinks it's a good time to play defense, while avoiding more cyclically oriented names: "Perhaps not so undervalued (by their very nature), but consumer staples like Procter & Gamble,  Campbell Soup (CPB), and  Kimberly-Clark (KMB) look good right now. With gross domestic product growth no more than 2% and a stormy worldwide economic outlook, I like companies whose valuations aren't bouncing around as much as most of the markets are. I also like utilities now. Less favorable, I'd say: construction (for example,  Caterpillar (CAT)) and industrials generally."

A broad swath of blue-chip dividend payers--many of them gleaned from Morningstar's StockInvestor and DividendInvestor newsletters--had recently topped poster jakecalgary's shopping list. Jake wrote, who "I have been picking up larger-cap blue chips with decent dividends (or potential for decent dividends in the near future, that is,  Wells Fargo (WFC) and  J.P. Morgan Chase  (JPM)). In this low-interest, low-growth environment, good dividend stocks are the way to go for me." In addition to the banks, Jake has also been buying a grab-bag of other names, all of which are favorites of Paul Larson and/or Josh Peters, including Procter & Gamble,  Paychex (PAYX), PepsiCo, ExxonMobil,  Western Union (WU),  Republic Services (RSG), Campbell Soup,  Sysco (SYY),  General Electric (GE), BlackRock (BLK), and Berkshire Hathaway.

Poster DMass74 shares the view that dividend payers look attractive right now, writing, "The market mavens I follow, including Morningstar's own Josh Peters, are recommending high-yielding dividend payers. And although the turnover rate of my portfolio is quite low, within the last month I've nibbled away and increased my exposure to the following stocks:  Energy Transfer Partners ,  Pfizer (PFE), General Electric,  Waste Management (WM),  American Electric Power (AEP), and  AT&T (T)."

'Buying When the Blue-Suiters Consider It Unsound or Unsafe'
Financials, hard-hit during the recent market swoon, appeared on several posters' shopping lists, though several acknowledged that investing there entails significant risk.

Retired at 48 thinks banks look cheap, advising, "For you young accumulators, begin buying banking and financials. Read any investment book, it talks of buying low, selling high; buying when others fear things; buying when the blue-suiters consider it unsound or unsafe; buying when at or below book value. Banks meet this criteria. Young accumulators, we will not outsource banking to India. There will always be a town bank. As a group, too big to fail. Wide moats are developing (no-one else will be permitted to write mortgages in the future.) Banking is a no-loss sum game, meaning every bankruptcy is absorbed as new business by another bank."

R48 went on to lay out the following strategy: "Start by dollar-cost averaging from here, accumulating  SPDR KBW Bank (KBE) [a regional bank exchange-traded fund] or  SPDR KBW Regional Banking (KRE) [an ETF focused on large banks], or the broader ETF,  Financial Select SPDR (XLF). And a decade from now, when Merrill Lynch concludes it is safe to invest in banks, hand the shares back to them, of course at much higher prices. And if you hold for an investing lifetime, perhaps retiring early, tip a glass of wine to ol' R48 for the idea."

Treasur2 wrote, "I've added to my  American International Group (AIG) position--twice. In the last 7 days. Trading below book value, very low P/E. AIG is not going to disappear. Unwind maybe. Struggle in the short term, certainly, disappointment quarterly, probably. File bankruptcy. Hmmm. I'm betting no."

Poster shipmad, meanwhile, is biting on another controversial name, mortgage lender  Hudson City Bancorp . "[The stock] is not for the faint of heart, but I'm buying more as it drops. Nice dividend, even after the cut, and I think the company is decently managed and fundamentally sound for the long run. It will survive the recent restructuring charges mandated by the feds. However, the government-sponsored entities, Fannie & Freddie, continue to provide headwind competition for this and other mortgage lenders."

All About the Income
Other posters indicated that they'd been focusing on income-producing securities recently. PeterG wrote, "Mortgage REITs like Annaly Capital (NLY) look attractive because of low short-term funding costs and a juicy 14% yield. I like master limited partnerships, particularly  Enterprise Products Partners LP (EPD) and  Kinder Morgan Energy Partners LP  for the yield, lower commodity price sensitivity compared with other energy investments, and the tax advantages."

Some posters noted that they see value in income-producing closed-end funds.

Capecod wrote, "The grab for income securities is just starting, driven by baby boomers' not-so-subtle shift to fixed income holdings and, of course, a weakening global economy. With the Federal Reserve anchoring the base of the yield curve near zero for at least two years, all manner of leveraged fixed income closed-end funds present incredible value. High-quality investment-grade debt and preferred stock leveraged CEFs provide distribution taxable yields from 8%-10%, while many AA-ish levered muni CEFs provide distribution yields well in excess of 7% federal tax free. At current yields, these CEFs are also competitive with total long-term returns touted by equity enthusiasts--and that's before considering higher total returns that may follow price appreciation."

Poster DavidT is of a similar mind: "In your taxable account buy closed-end muni funds yielding 7.5% tax-free. In your sheltered account buy closed end bond and preferred funds. Interest is 7%-10% percent and the price keeps going up. The Fed has frozen interest costs for two years so the leverage is pretty safe. A fistful of cash it also a good thing to have around for possible big opportunities."

Uncleharley likes REITS for both short- and long-term reasons. "I think most REITs and REIT closed-end funds are showing a rare combination of short-term momentum, high dividend yield, and long term potential. This seems to be especially true with REITS that invest in healthcare facilities, such as H&Q Healthcare Investors (HQH),  Health Care REIT (HCN), or Omega Healthcare Investors (OHI)."

If You Can't Beat 'Em
Other posters aren't picking specific sectors or securities. Rather, they've been adding to stocks only to top up their allocations to specific market sectors.

Chief K summed up the strategy: "I'll know exactly where today's best bargains are next year at about this time. Until then, the only buying I'm doing is to fill in some shortfalls in my desired asset allocation: international and REITs in my case. If the whole market drops another 10%, I'll consider adding either a total stock index fund or an S&P 500 Index fund. If it dropped another 20%, then I know I'd start buying those index funds."

JAP in LB wrote, "I'm always buying regularly into total market index funds. I have bumped up a few buys in general market indexes as I have a 20-year investment horizon."

'It's Just Too Broken'
Still other posters noted that they're not enthusiastic about the market at this juncture, pointing to the economy's weak growth prospects and political gridlock.

Csmitty, while nibbling on a few odds and ends, is pessimistic about the market's prospects. "I've been 60% cash and 20% bonds since late 2010. Put just a bit back into market as I think the fundamentals are still broken and not much has changed in past 18 months. In fact, one could argue the fundamentals are worse in that we now know the politicals are not brave enough to fix this mess whether it be in U.S. or Europe. It's just too broken. Plus, I'm cautious when I hear 'buy on the dips' as I believe that S&P is still overvalued."

DrBobb concurred with that valuation assessment, writing, "The fall wasn't big enough to make buying more equities attractive. If the market falls below 9,000 on the Dow then a few dividend-paying stocks will become attractive. In the meantime, there is too much risk. The greatest risk is Europe. France can't bail out the other countries. And it doesn't make sense for Germany to take on the debt needed to do it. The odds are 50/50 that countries will default, that the Euro will go away, that European banks will be in crisis and that a world recession will start. It is a slow=motion crisis with no good solution in site. Consequently the market is not low enough to justify the risk of buying more stock, even blue chip stock."

Jfree noted that opportunities created during the recent sell-off quickly got away from him. "I liked some natural gas trusts and international stocks. But everything has already run too far too fast. I am now sitting. Everyone is out there looking to chase the bottom and I don't think investors have really processed the impact of a slowing economy (or worse a financial crisis from Europe) and a Fed that admits it's out of bullets. Or maybe the market is now completely rigged by the free-money nanosecond computers and there is no hope for humans anymore."

David Boddy contributed to this article.

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