3 Dividend Stocks To Buy And 3 To Sell As Volatility Increases

| October 7, 2016 | 0 Comments

We’re just about a month away from the election, so expect volatility to ramp up as the S&P 500 has fallen an average of 1.5% in this time frame over the last five elections. With even more volatile candidates this year, it might be safe to say the market could drop even further than average. Here are three stocks that might fall hard and three safer choices to buy instead.

The Presidential election will be here in just over a month. The first Presidential debate last week between Hillary Clinton and Donald Trump was the most watched debate ever.

It even topped the 1980 debate between peanut farmer Jimmy Carter and Hollywood star Ronald Reagan – where the two talked nuclear arms treaties and Iranian hostages.

Fast forward over 25 years and foreign policy is still the key topic of discussion. With that, investors are singularly focused on what happens after the Presidential election. But in the meantime, there’s a lot that could happen over the next few weeks.

That is – regardless of who wins, the next month will bring a lot of unrest in the market.

Over the last five Presidential election cycles, the S&P 500 has fallen an average of 1.5% in the month before the election. All sectors have been down on average. Digging even deeper, volatility tends to pick up as well.

The CBOE Volatility Index – a measure of market volatility – has climbed each time during the month before the election over the last six Presidential elections.

A prudent investor strategy for taking advantage should be to sell highly volatile stocks that will likely take a hit in the next month while buying up the companies that perform well when the market is in turmoil.

With that in mind, here’s the top three that could be major under-performers over the next month:

Election Stock To Sell No. 1: Priceline (NASDAQ: PCLN)

PricelinePriceline is the undisputed leader in the online travel industry, where the shift toward online booking has been a boom for the stock. Priceline handles over 50% of the industry’s travel bookings done online. However, Priceline is on ‘shaky’ ground as new competitors continue to look to take market share. Things look especially shaky when you consider that Priceline trades at over 7 times sales.

The big threat facing Priceline right now is the likes of home sharing services, namely Airbnb. The current setup in the home sharing versus hotel booking industry is a lot like the Uber versus taxi industry that rose a few years ago. Uber, Lyft, and other ride-sharing apps have effectively won that battle and I’d expect Airbnb to do the same as it starts to gain traction overseas.

Priceline has been a volatile name in the past, with a beta of 1.6 – which means that when the market falls by $1, Priceline should theoretically fall by $1.60. The flood of competition to the market only adds to Priceline’s volatile nature heading into the election.

Election Stock To Sell No. 2: Salesforce.com (NYSE: CRM)

Salesforce.comSalesforce trades at over 230 times earnings and offers a product that has effectively become commoditized. Customer resource management (hence the company’s ticker) software took off in the 1990s, but competition has now flooded the industry. The switching costs are low and customers are easily able to find lower cost solutions compared to Salesforce.

The other negative catalyst for Salesforce is a potential buyout of Twitter (NASDAQ: TWTR). Shares of Salesforce have sold off by over 10% in the last month as investors didn’t take kindly to the news that the company is considering a buyout of Twitter. If they do end up doing a deal for Twitter, expect even more downside.

Election Stock To Sell No. 3: Workday (NASDAQ: WDAY)

WorkdayTrading with a beta of 2.0, this is the most volatile name on our list. Shares have soared 23% over the last year and now trade over 13 times sales and nearly 300 times near year’s earnings estimates.

It’s a ‘sexy’ cloud application business but one that makes virtually no money. As well, it’s facing some intense competition from SAP (NYSE: SAP) and Oracle (NASDAQ: ORCL), which are getting more aggressive in the cloud business. Workday’s big plan to diversify includes providing more financial applications, which has historically been a low growth part of the market – financial apps just don’t excite companies.

With all that, there are stocks you can own that will be less susceptible to the market volatility, plus they offer underrated dividend yields that make them even better during uncertain times. Here are the top three election time buys:

Election Stock To Buy No. 1: Johnson & Johnson (NYSE: JNJ)

Johnson & JohnsonTo start, one of the best parts of Johnson & Johnson is perhaps its 53 year-long streak of annual dividend increases. Its solid dividend yield of 2.7% isn’t something to be overlooked either. This, and its robust presence in the healthcare and consumer staples industries means that Johnson & Johnson enjoys reduced volatility in its stock price. Its beta stands at just 0.6 – which means for every $1 the stock market falls, Johnson & Johnson’s stock should theoretically only fall $0.60.

One of the other, perhaps more interesting parts of Johnson & Johnson, and adding to the stability, is the fact that it’s moving away from the riskier and more expensive route of developing drugs. Instead, it’s being prudent with acquisitions to help give it access to new growth markets.

It bought up Abbott Laboratories (NYSE: ABT) eye surgery business earlier this year, giving the company access to a very profitable part of the healthcare market. Its balance sheet is still robust and can handle plenty more acquisitions.

Election Stock To Buy No. 2: Cardinal Health (NYSE: CAH)

Cardinal HealthDespite being a $25 billion market cap company, Cardinal Health is often overlooked, as it’s not in a ‘sexy’ business, being a distributor of healthcare products and supplies. Nonetheless, it’s a steady business and performer – paying a 2.3% dividend yield and having upped its dividend for 11 straight years.

It has a large network of medical suppliers and pharmacies, all of which has helped it recover nicely from losing Walgreens Boots Alliance (NASDAQ: WBA) as its major customer three years ago. The aging population has, and will continue to be, a key tailwind for Cardinal Health, where the usage of medical supplies and drugs are on the rise.

Election Stock To Buy No. 3: Bristol-Myers Squibb (NYSE: BMY) 

Bristol-Myers SquibbBristol-Myers has lost over a quarter of its market value in less than three months, now trading at $55 a share. This comes as one of its most promising drugs, Opdivo, hasn’t been as promising as expected during trials.

The key is that Opdivo underperforms chemotherapy, but still handsomely outperforms its major competitor. Plus, Opdivo will still undergo additional tests for the effectiveness of the drug. The other key is that Bristol-Myers is historically a stable and steady stock, with a beta of just 0.7. The pharma company has other drugs that generate a lot of money and its dividend, which yields 2.8%, has grown for six straight years.

Opdivo was expected to add $5 billion in sales to Bristol-Myers, but the fact that it might take a little longer to do so has led to a $20 billion haircut in its market value – something seems amiss.

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However, not all high-yield stocks are created equally. Out of the entire universe of hundreds of higher yielding stocks, I would probably throw out three-quarters of them because they do not meet the criteria I have for the safety of the dividend payment. And I almost exclusively invest in high-yield stocks!

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Category: Dividend Stocks

About the Author ()

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments. Tim’s also editor of Weekly Income Accelerator, a covered call trading service, and Automatic Income Machine, a dividend growth service focused on growing your nest egg.

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