Things are getting a little hairy in the markets, to say the least. The
Dow Jones Industrial Average,
all opened with sharp losses on Thursday. The Dow and the S&P 500 both regained ground to finish with narrow losses, while the Nasdaq finished slightly in the green.
Investors who want to protect themselves without resorting to the under-the-mattress strategy may want to consider these five themes and six stocks.
Stocks with internal improvement opportunities
It’s a bonus for investors when a stock can work even if the market hits a rough patch. That can be the case if something significant is happening at a company. It could be a sale of assets, or a commitment by management to buy back stock, cut costs, or slash debt in a new and significant way.
(ticker: UTX) has just closed on its acquisition of Rockwell Collins and said it would split into three separate companies: one dedicated to climate control, one for aerospace, and one for elevators. The breakup may take up to two years to complete, which raises the risk of “stock limbo.” That is to say, the shares may not do much while investors wait for the new entities to emerge.
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Limbo might not be a bad outcome right now. Both the climate and elevator businesses have high recurring revenues and the aerospace cycle has been the shining star of the industrial economy. United Technologies is trading for about 15.4 times next year’s estimated earnings.
Look for non-correlated assets
Another way to avoid market risk is to focus on sectors that don’t necessarily move in line with global economic growth. Agriculture and health care are the two that come to mind.
Agriculture is all about the weather, and—as the saying goes—people need to eat. Deere (DE) stood to benefit from trade detente with China, given that the Chinese had reopened their markets to U.S. soybeans after the G-20 meeting, improving life for the farmers who buy Deere equipment. That market access may be in jeopardy now that the U.S. has had Canadian authorities arrest the chief financial officer—and daughter of the founder—of Huawei Technologies. Still, the short-term fortunes of Deere stock depend more on rainfall next June than the resolution of political tensions.
And consider that health care is a sector with infinite demand. There is no limit to how healthy and long-lived people want to be—even if it is occasionally difficult to pay for therapies. Over the past three years, the correlation of the pharmaceutical components of the S&P 500 with the broader market has been about 0.7, indicating that those stocks aren’t simply driven by the market’s currents. A correlation of 1 indicates that a stock, or group of stocks, move in the same direction and the same amount as the overall market.
(BMY)—a large drug stock that BMO Capital Markets upgraded on Thursday—has had a negative correlation with the broader market over the last three years. That means that when the market zigs, Bristol-Myers tends to zag. Not bad when stocks are plunging.
Staples are safe, with one caveat
Consumer-staples stocks are always supposed to be safe, but today, investors have to think about one other factor. That’s leverage. Many consumer-product companies have added debt to make acquisitions or to buy back stock.
(BUD) surprised the market earlier this year when it cut its dividend to focus on debt reduction.
Beer is meant to be an investment haven, but BUD stock is down 33% in 2018.
(CL) is a consumer-staple company that hasn’t bought anyone large lately and doesn’t have much debt.
Back to utilities
Utilities have debt, but they are, well, just utilities. These properties don’t make or break you when playing Monopoly, but everyone likes to own them. The shares are only half as volatile as the overall market, and although the stocks tend to fall when bond yields rise, it looks as if the Federal Reserve is backing off its more hawkish stance after calling interest rates near neutral.
stock (SRE) is the highest-rated utility on the Street, according to Bloomberg.
Don’t pay high prices
It’s always a good idea to pay less. That’s what stocks with low price/earnings ratios can offer. Of course, often a stock is cheap for a reason, and plowing in cash can be a mistake. There could be turmoil in the executive suite, or business fundamentals might simply be terrible. Sometimes, though, a low valuation just means a stock or a sector is out of favor. The pharmacy stock
stock (CVS) trades at only 10.4 times estimated 2019 earnings, yet lots of Wall Street analysts rate it a Buy.
It’s hard enough to sleep in this market. There’s no need to stuff cash under the mattress.
Write to Al Root at email@example.com