Is the buy-and-hold strategy dead?
The rules of investing are changing, says this U.S. advisory, and it's time for investors to be alert for cyclical stocks — like these four.
We hear this lament more often these days.
The days of buy-and-hold investing are over. Times have changed. The rules are different now.
The latest to sound this cry of warning is an influential American advisory.
The editor of Personal Finance, Mr. Elliott Gue, says it’s time to stop chanting the “buy, hold and forget” mantra that was heard throughout the great post-1982 rally in American stocks.
No point in humming that tune about picking up bargain stocks at knock-down prices, either — the “buy on dips” creed is dead, too.
The fact is, “there’s a new game in town for smart investors in U.S. stocks,” he claims.
We might ponder what this means for smart Canadian investors (in Canadian or U.S. stocks) as well.
But Mr. Gue’s chief concern is with the U.S. economy. It just isn’t going to be the same as it used to be, and neither is the stock market.
He tells us why the investment landscape is going to look so much different — and where there may be greener pastures in which to invest.
Giving up “buy-and-hold” doesn’t equal “stop buying”, and this editor has four stocks to recommend.
Unending desires
It all gets down to debt, you won’t be surprised to hear. The U.S. debt is at epic proportions. “As a result,” Mr. Gue says, “highly leveraged households can’t borrow money to fund their unending desires.”
The math just doesn’t add up. If consumers account for two-thirds of America’s Gross Domestic Product (GDP), increased savings and greater frugality are bound to spell subdued economic growth.
The government is trying to replace the consumer by going on a spending spree of its own, but even it doesn’t have deep enough pockets. And government debt is exploding — by 2019 it will approach 70 per cent of GDP. Last year, it was 40 per cent.
Foreign buyers will demand a higher interest rate as compensation for financing America’s deteriorating fiscal position. And those higher rates will cut down spending by U.S. consumers, government and businesses.
“Rising government spending and a growing tax burden have historically spelled trouble for stocks,” writes the editor. The last time it reached the pace it’s on now was from the mid-‘60s to the early ‘80s. Stocks moved sideways like crabs and inflation roared like a lion.
No Chicken Littles
But while investors need to recognize these long-time risks to America’s growth, Mr. Gue says, “this is no time for Chicken Littles.”
You don’t need to flee from the market. “Simply play the shorter cyclical moves and focus on long-term growth themes that can withstand a lackluster U.S. economy.”
In fact, this editor turned to a few key sectors in fall 2008 and adopted a more bullish stance in the spring. But that stance is cyclical. Again, history is his guide. A diversified basket of stocks bought in 1968 went sideways for 15 years. But the S&P 500 produced a few cyclical rallies, some to the tune of 125 per cent gains and lasting as long as six years.
We’re in the midst of a cyclical rally, and some stocks will benefit as the economy snaps back — even if the recovery falters in a year or so.
If you want long-term secular growth, look to emerging markets, Mr. Gue suggests. On the home front, look for sectors that surge. He likes two: energy and technology.
Standing up to pressure
Consumers may be pinching pennies here, but as incomes rise in the emerging markets, the opposite will be true, says Mr. Gue. And greater spending means greater demand for energy.
In the meantime, the world’s great oilfields have passed their prime. Oil companies will be working with more complex fields like the deepwater wells off the Brazilian coast or Alberta’s oil sands. That brings two stocks to this editor’s mind.
The specialty of oil services giant Weatherford International (NYSE-WFT) is making the most of mature oilfields. The stock went down after Mexico’s Pemex decided to re-evaluate some of its production plans. But across the globe, drilling is picking up in Russia, where Weatherford also has a strong foothold.
The stock is a buy to $25, and trades at $15.74. It pays no dividend.
In the deepwater fields, Tenaris (NYSE-TS) has a big role to play. With temperatures over 300 degrees Farenheit and pressure at 10,000 pounds per square inch, you’d better have hardy equipment.
Welded pipes and casings can’t always stand up to the pressure. Tenaris makes advanced, seamless Oil Country Tubular Goods (OCTG) formed of super-strong alloys. As exploration and development proceeds, so should this firm. Buy it up to $45, says the editor. It trades at $38.68 and yields 1.3 per cent on a dividend of $0.52.
Best-performing sector
Technology is second to energy in producing foreign sales, Mr. Gue informs his readers. “It’s no accident technology stocks were among the first groups to emerge from last year’s downturn and that tech is the best-performing sector in the S&P 500 this year.”
The biggest benefactor is the biggest name, IBM (NYSE-IBM). It continues “to eat its rivals’ lunch in the software and service business,” states the editor frankly. Its rising market share and lean cost structure put it in perfect position to grow as tech spending increases. And it’s primed to make acquisitions as well. It’s a buy up to $130. It’s trading at $127 today and yields 1.73 per cent on a $2.20 dividend.
Another well-established name is that of Texas Instruments (NYSE-TXN). Its microchips go into cellphones, computers and HDTVs. Lately it has been doing well with “power management chips.” This is hot area of growth due to the need to crank up performance for today’s battery-hungry electronics products.
Buy Texas Instruments under $30, says the editor. It’s at $25.58 and yields 1.79 per cent on a dividend of $0.48.
Buy by all means, says this advisory, but if you hold on indefinitely, the market will leave you behind.
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