Sunday, February 8

Week 188 - Markets Fall, Markets Rise. You’ll Need a Safety Net.

Situation: For almost 6 yrs, the stock market has risen steadily on the back of Federal Reserve policies that make investing in bonds seem foolish. That’s fun for awhile, especially if you’re a stock-picker. But it won’t be fun for much longer. “Defensive stocks” -- the best of which we refer to as “Lifeboat Stocks” (see Week 174) -- are now overpriced (except for WalMart). In addition, the Federal Reserve is likely to raise interest rates in 2015. That will encourage investors to take some money out of stocks and put it into bonds, rebalancing those competing assets. In such an event, you'll be likely to face two issues: 1) There may be a stock market pullback heralded by key infrastructure stocks, as appears to be happening already; 2) defensive stocks will get hurt as much as growth stocks because they’re more overpriced. That means you’ll want to dollar-average into growth stocks, i.e., stable, long-term outperformers selling at a reasonable price. To help you find those, we’ve subjected the entire Barron’s 500 List to the Buffett Buy Analysis (see Week 30 and Week 183).

Because of overpricing throughout the stock market, our list of companies for you to consider is rather short. It contains only 16 names and, as expected, none are from defensive industries (consumer staples, healthcare, utilities, and telecommunication services). You’ll see the entire list in next week’s blog but there are only 3 Dividend Achievers among the 16: Ross Stores (ROST), QUALCOMM (QCOM), and Expeditors International (EXPD). We’re particularly interested in those companies, since their record of raising dividends annually for at least the past 10 yrs makes their stock valuable in retirement as a way to beat inflation.

For this week’s Table, we’ve taken those 3 companies and added 4 more that I dollar-average into and call “Cornerstone Stocks.” Those 4 are WalMart Stores (WMT), ExxonMobil (XOM), Microsoft (MSFT), and NextEra Energy (NEE). You should pick 4 of your own to dollar-average into. 

Bottom Line: These 7 stocks are likely to mitigate your losses in a bear market and perform better than our benchmark (VBINX) in a bull market. As a group, they’ll form a Safety Net for your portfolio. However, only two are Hedge Stocks (see Week 182), WMT and NEE, so you’ll need to balance your investment in any of the other 5 companies with Treasury Notes, Savings Bonds, or a low-cost intermediate-term bond index fund like VBIIX (which is entered 5 times in the Table to represent this balancing).

Risk Rating: 4

Full Disclosure: I dollar-average into WMT, XOM, MSFT and NEE. 

NOTE: Metrics highlighted in red denote underperformance relative to our benchmark, VBINX.

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