Stocks are likely to continue rising over the long term but there is also a rising probability of a near-term correction. Expectations of further significant gains in the mid-term is waning.
What’s a cautious and value-oriented investor to do? Selling in an up-market is likely to cause underperformance while staying fully invested could cause some stomach-churning moments.
The remedy: Seek the stocks that have underperformed this bull market. That means Toyota Motor (TM – Get Report) , Honda Motor (HMC – Get Report) and Verizon (VZ – Get Report) .
Why are they underperformers? The trick is to identify those stocks that have done so as a result of the market mispricing the stock, not because of a systemic issue with the company.
For those willing to do their homework and stick with a strict and consistent investment discipline, these three underperformers could shine over the next 12 months.
Toyota: The company’s troubles have been well documented over the past couple of years. Its shares, at close to $116, are down over 5% for the year to date. Yet, consider these points:
* Toyota has managed to beat earnings estimates over the past two quarters
* TM still (only) has a trailing P/E of 10.5.
* With a dividend approaching 3%, Toyota could be a smart investment over the next few years.
Honda: At close to $34, the stock is down over 18% for the year to date and 11% for the past 52 weeks, in part as a result of a string of disappointing earnings reports. What’s to like?
* The company seems to have righted the ship.
* HMC has grown revenue and profits at a good clip over the past two quarters.
* Analysts expect Honda to grow earnings by some 85% over the next five years, making this an attractive growth stock for patient investors.
Verizon: Verizon, along with several of its telecom peers, has underperformed the broader market. At $49.40, its shares are up less than 1% for the year to date. Here’s what makes it a particularly under-the-radar choice:
* It will likely continue to lag for a little while longer, thus not coming to many investors’ attention — the ultimate “buy low.”
* It has a near 4 3/4% dividend yield.
* With its expected EPS growth rate of 7 1/2% over the next five years, Verizon is a good core holding for more cautious investors.
Please note: Two of the three stocks above are in the automotive industry. By no means should you add to this category if you are already holding enough in that sector.
Above all in this environment, remember to stay well diversified. My personal rule of thumb: For any single sector, 15% of my portfolio is the limit.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.