Stocks To Go Long On

Ok kids, it's time to see what the heck you can buy in a market that is overvalued.  But if the market is overvalued, how can there be good buys?  The great thing about an irrational market is that there are always good buys in an upmarket and bad buys in a down market.  The first thing I do is take a look at down sectors and try to find companies that are only down because the sector is down. 

Currently, there are a couple of sectors that have beat up pretty badly despite the run up the market has had in the first quarter of this year.  The most beat up sectors have been financial, materials and energy.  Yes, even though gas prices and electricity have been up, the sector overall is down due mainly to natural gas and coal.  So, lets take a look at these sectors and see what is the best stock to purchase from each.

First, we'll look at the Financial sector and the king of value right now is Bank of America (BAC).  Yes, I know this is the largest bank in the world, so there cannot be very much growth for this stock, right?  You are correct sir, but we are talking about value, i.e. "undervalued" companies.  BAC is trading right around $9 per share.  It is up from its low of just under $5 in the past 52 weeks, but it is still way, way undervalued.  Looking at its financials, it has the most cash and also the most debt of any company in the world.  It has about $600B in cash and about $650B in debt.  The cash total comes out to about $56 per share and BAC is currently trading at just under one-half of its book value.  So, if BAC was trading at the value of its underlying assets minus its debt, it would be trading near $20 per share.  I've always felt this company was a mid-twenties stock.  The debt is alarming, but it is mainly due to BAC taking over Countrywide.  BAC has a huge stockpile of real estate that, once housing starts to turn around will become a huge cash cow when it starts unloading its inventory.  However, BAC will be up for a decent drop next month when Moody's lowers BAC's credit rating to just above junk bond status.  All the dummies will see that announcement and start dumping BAC, which is when the savvy investor will pounce.  I currently own BAC and the most recent buy I made was at $6.61.  I've never sold this stock and am looking to increase my position after the drop. 

Next up is the Materials sector.  Peabody (BTU) is a coal company and has been beat up excessively due to the decrease in demand for coal and the new EPA standards for emissions.  I believe the reaction to the slight decrease in coal demand and the new emission regulations are not the big hurdle that investors believe it is and have overreacted by dumping this stock.  It has a 52 week high of $69 and is currently trading just under $28.  I believe this stock is valued in the $85-$95 dollar range currently, so it is trading at a steep discount.  I do own this stock and currently am looking to add to my position.  Coal is going to be around for a long time, since it is so cheap and China, India and other developing nations are going to be driving up the demand and price. 

Finally, we have the Energy sector.  Chesapeake (CHU) has been beaten up to the tune of about a 33% drop in the past year.  CHU has continued to grow its assets and pay down debt.  The ship has been righted with this company as they were running massively in the red as recently as 2009.  This stock is cheap right now and the company is on the road to success.  Plus, Chesapeake is mainly known as an oil company, but has acquired large inventories in natural gas, which will position the company well, when the demand for natural gas begins to climb as the price of oil gets too high and forces consumers to think alternative energy.  Unlike the previous two companies, I do not own any stock in Chesapeake.

Just a reminder, these are stocks to go long on.  When I say going long, I mean that you should plan on owning these stocks for at least ten years.  They are not geared as trades, but if you do try them as trades, proceed at your peril.