Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.



Close

Stocks that Gap Down on Earnings: Bargains or Deathtraps?

By Jim Fink on August 2, 2011

Print Friendly

Low capital costs plus abundant opportunities to bring shale gas and liquids to market: That formula continues to drive our MLP Profits Portfolio favorites’ cash flows and distributions higher.

– Roger Conrad, MLP Profits

What a tough stock market! All summer, stocks have struggled due to the uncertainty caused by the end of quantitative easing part 2 (QE2) on June 30th and the August 2nd debt-ceiling deadline. Then, after a debt-ceiling deal was agreed to over the weekend, the anticipated relief rally on Monday morning lasted two whole minutes (9:30 AM EDT to 9:32 AM EDT) before viciously reversing into a substantial decline by the market close. With the S&P 500 down again today, this will likely mark the seventh consecutive day of decline. 

Maybe it’s just wishful thinking on my part, but it feels an awful lot like both October 1998 and March 2009 when stocks declined sharply to start the month only to bottom after the first week and rise from there. Hedge fund manager Doug Kass also feels we’re near a trading bottom, whereas Marc Faber (a.k.a. Dr. Doom) predictably thinks a new bear market has just begun.

Regardless of your view of the stock market’s near-term direction, one fact is clear: energy-based master limited partnerships (MLPs) are an oasis of safety that outperforms the S&P 500 in good times and bad. After a blistering 76.5% performance in 2009 and 35.9% performance in 2010, MLPs are outperforming the S&P 500 again this year (albeit by less than 1%)! This continued outperformance may be a surprise to some, given the May crash in commodities and the widespread (but mistaken) belief that energy MLPs are beholden to energy prices. The truth is that many MLPs are not highly sensitive to commodity prices.

Take a look at the relative performance of the Alerian MLP index ETN (NYSE: AMJ) compared to the 12-month oil ETF (NYSE: USL) and the S&P 500 ETF (NYSE: SPY) since the beginning of the commodity crash on May 2nd until yesterday (Aug. 1st):


Source: Bloomberg

 

MLPs are the clear winner, besting the S&P by 1.16 percentage points and oil by a whopping 9.77 percentage points. It appears that the S&P is more sensitive to oil price declines than MLPs are!

Gap-Down Stocks are a Sign of a Slowing Economy

As bad as the S&P 500 has fared recently, many individual stocks have fared much worse. In fact, I have never seen so many stocks gap down simultaneously in my lifetime.  The second-quarter earnings season may have been positive, but the forward guidance offered up by many companies has been negative and that has caused many stocks to crater. Investors are understandably fearful that an economic slowdown is going to severely reduce company earnings going forward.

This morning’s announcement from the U.S. Commerce Department that consumer spending fell in June for the first time in almost two years doesn’t allay anybody’s concerns. And the recently-concluded deficit-reduction agreement has introduced new investor fears concerning industry sectors reliant on government spending, such as national defense and Medicare-dependent health care.

Bottom Fishing Can Be Very Profitable

Still, fortunes have been made bottom-fishing in solid stocks that have briefly stumbled, so it’s worth examining some the recently fallen to see which ones might be bargains right now.  Of course, bottom fishing can also be incredibly dangerous if the stock is not solid and its downturn is just a symptom of a failing business and more price declines yet to come. The phrase warning against “catching a falling knife” is an appropriate one to remember. Below are two lists of gap-down stocks. One list comprises five large-cap companies primed to rebound and the other list includes five smaller-cap stocks that might have further to fall:

Bullish Gap-Down Stocks (Large Cap)


Company

30-Day Return

Market Cap

Industry

ArcelorMittal (NYSE: MT)

-17.5%

$45.4 billion

Steel

Illinois Tool Works (NYSE: ITW)

-14.7%

$24.5 billion

Industrial Equipment

3M  (NYSE: MMM)

-11.2%

$61.0 billion

Conglomerate

Pepsico (NYSE: PEP)

-9.5%

$100.5 billion

Soft Drinks and Snack Foods

Procter & Gamble (NYSE: PG)

-5.0%

$170.4 billion

Household Products

Bearish Gap-Down Stocks (Small Cap)


Company

30-Day Return

Market Cap

Industry

Frontline Ltd. (NYSE: FRO)

-33.5%

$768 million

Oil Tankers

RealD (NYSE: RLD)

-40.6%

$738 million

Motion Picture Equipment

STEC (Nasdaq: STEC)

-45.2%

$491 million

Data Storage

TeleNav (Nasdaq: TNAV)

-45.3%

$403 million

GPS Navigation

VistaPrint N.V. (Nasdaq: VPRT)

-42.6%

$1.2 billion

Office Supplies

Source: Bloomberg

Find the Best Tax-Advantaged MLPs with the Help of MLP Profits!

Many conservative investors are afraid to bottom fish and possibly “catch a falling knife.” If you simply want solid companies that consistently outperform the S&P 500 and increase their cash distributions on a consistent basis, energy-based MLPs are the investment vehicle for you.

Roger and Elliott spend all of the waking hours studying the MLP industry. The recommended portfolios in their market-beating MLP investment advisory, MLP Profits, includes only the “best of the best” energy-based MLPs – those that keep raising their cash distributions. Roger recently wrote to subscribers that MLPs remain outstanding high-yield investments:

It’s still possible to buy high-quality MLPs yielding between 5 to 9 percent, and these companies are poised to grow those dividends anywhere from 5 to 10 percent.

Over the long term MLPs’ unit prices follow distributions higher. As a result, dividend growth for our favorites adds up to annual returns of 10 to 19 percent. That’s superior to almost anything else I can think of, particularly anything that’s tax-advantaged, as MLPs are.

To find out the specific names of the energy MLPs Roger and Elliott like best right now, give MLP Profits a try today!

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • Use Social Connect
  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.