A $10 bill can barely get you in a movie theater anymore, but it can buy you shares in some of the most illustrious names in the stock market.
In the past several months, bluechip companies including Bank of America, Citigroup, General Motors and Alcoa all have slumped below the vaunted $10 line on the New York Stock Exchange, presenting investors with opportunities—and dangers—the likes of which haven't been seen in generations.
"There is a reason they are at those prices," says David Twibell, president of wealth management of Colorado Capital Bank in Denver. "You have to ask yourself 1) how long will they stay down there? And 2) is there a real possibility in the auto sector—and probably in the banking sector as well—that these companies won't be around a year from now? Certainly that's the way they're being priced."
Questions abound, to be sure:
- Is Bank of America (NYSE: BAC) at under $7—and Citi (NYSE: C) at under $4—a screaming buy or a sandtrap?
- Is GM (NYSE: GM) a steal at under $4 or will it be a relic next year if the US auto industry completely collapses?
- And will Alcoa (NYSE: AA) at under $9 be looked upon as one of the great market bargains when President Obama's infrastructure-based stimulus plan kicks in, or will the company be undercut by its smaller rivals and fade into obscurity?
The answers are likely to be different in each case, and that means investment pros will be left to sift through the wreckage and find those bargain-basement-priced companies that will survive.
So they're employing a variety of strategies—from dipping their toes a bit at a time to using the safety of exchange-traded funds—to make their clients money in a puzzling environment.
"We don't always know which ones are going to be the amazing turnarounds," says Peter Miralles, president of Atlanta Wealth Consultants. "But there's opportunity out there, there's no question about it."
Ways to Play
Still, Miralles isn't willing to jump off a pier and start snapping up shares of the sub-$10 Dow stocks.
Instead, he favors using indexes, particularly through exchange-traded funds that play the indexes that gauge sector movements.
"I don't mind owning some of these companies that frankly nobody trusts right now in an ETF or a diversified portfolio," Miralles says. "That's what indexing is all about--being able to invest in so many of these left-for-dead companies that some of them are going to come back and be big winners somewhere down the road."
The strategy works especially well for dividend players who have gotten burned by individual companies looking to increase their cash positions. Some of the bigger ones are slashing dividends, burning investors holding individual stocks, while those making broader plays on the sectors are getting protection.
"There's just so much risk out there and right now the question is longevity. How long does this recession go on?" says Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "It's very easy for a company to preserve cash by cutting dividends."
ETFs that Baum is looking to for cover include the SPDR Financial Sector Select (NASDAQ: XLF) that entails a variety of financial components and pays a nearly 8 percent dividend, as well as the Vanguard Value (NASDAQ: VTV) which pays more than 6 percent. Both funds include BofA and Citi.
Those wanting to own some of the names also are being advised to take small positions and then increase their holdings if the companies continue to rise--sort of a reverse dollar-cost averaging that helps assure investors they're getting stocks on solid ground.
And still others are making sector plays that take advantage of how industry leaders are dragging down their peers.
For instance, Colorado Capital is buying banks that have been undervalued due to pressure from industry leaders BofA and Citi.
In particular, Twibell likes Wells Fargo (NYSE: WFC) and JPMorgan Chase(NYSE: JPM) as companies with beaten-down prices but solid balance sheets and positions that should leave them as survivors once the dust clears from the banking implosion.
"The better way to play it is to stay away from some of those names that have just gotten destroyed ... and look at some of the others like Wells Fargo that have really been dragged down with them," he says. "They're in a better position than Bank of America is right now but they've taken a hit as well."
On some of the other names, Twibell says he has little interest in GM unless the company drastically changes the way it does business, while he says Alcoa could benefit from the stimulus but he favors some smaller companies in the space like Freeport McMoRan (NYSE: FCX) and the Shaw Group (NYSE: SGR).
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It's also worth noting that those looking for low-priced stocks of big companies don't have to limit themselves to the Dow 30, which likely will shed some of its underperformers in the coming days in favor of more stable companies.
One company drawing interest is smartphone maker Palm (NASDAQ: PALM), which was trading below $2 in December but has made a comeback in the past month.
"The fundamentals have turned around. At the same time there's some skepticism and the analysts have not completely bought in," says Ryan Detrick, analyst at Schaeffer's Investment Research in Cincinnati. "That's one of the low-dollar stocks that we think offers opportunities, but for the most part we think low-dollar stocks are low-dollar for a reason."
Detrick is pessimistic overall and advises caution when buying stocks whose share prices have been ravaged by the economic downturn.
"For a lot of these big names and the financials in general we're still bearish. It wouldn't shock us if they continue to go lower," he says. "We don't think this market has bottomed yet."
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