Putting Some Chips Back on the Table

My last column in July espoused selling stocks and playing poker. This column advocates the opposite. Enough stocks have dropped significantly to low valuations and with decent fundamentals to trigger new buying in my portfolio. But before you get all lathered up and label me a raging bull, let me explain.

I use a formal low-P/E investment discipline that permits buying stocks only in companies that are down and cheap. When the buy list is laden with undervalued stocks in average companies that have suffered meaningful declines, I build up the long side of my book. When the list is meager, I tend to take profits.

In July, the list was skimpy, and I reduced equity exposure. However, today it's replete with good companies at low valuations. Therefore, I am buying. In the investment business we call this a "bottoms-up" process.

I am not a rip-snorting bull. Large fundamental issues concern me enough that I avoid any significant margined long position. Interest rates continue to rise, real estate is tapering, cost pressures continue to increase, and consumption (and hence economic activity) appears due for a rest. And stock market valuations in general, while much better than at the beginning of this year, are hardly cheap.

But I simply cannot ignore what my new purchase list is suggesting. And that is to add stocks to my portfolio. Which stocks?

Some of the old favorites have pulled back enough to become excellent values, ConocoPhillips(COP) for example. At Thursday's close of $60.90, the shares trade for about 6 times this year's earnings, with excellent exposure to higher commodity prices and refining margins.

While the company may be 10 times "normal" profits (if we ever get "normal" oil/gas prices correct again), that's still way too cheap in a 16 P/E market! I believe the stock is discounting oil in the $35-$38 range. Conoco is still one of the best growth stories in the sector when comparing its strong revenue/profit growth with its compelling valuation. My price target is at least 30% higher. If I could own only one oil stock...