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STOCK STRATEGIES
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They worked as planned, achieving your price targets; They became unreasonably priced; They were wasting your capitals time value by going nowhere; or They developed significant fundamental problems.
What are discredited and panic-trigger-related industry groups? These groups differ from one market cycle to another, and will depend on the headlines of recent months. For example, brokerage stocks would have been poor choices to hold after the 1987 crash because of all the controversy surrounding program trading. Large international banks were laggards in the fallout after the LTCM hedge-fund debacle in 1998 because of their lending exposure. Anything with a Latin American tinge became taboo for a while after the Mexican peso devaluation in late 1994. Technology remained in the doghouse for seemingly a dogs age after the 2000 bubble burst. The common thread is that, although certain stock groups may indeed be cheap, they will not yet be ready to rebound soon after a related crisis. Make sure that your expectations are not in direct conflict with prevailing consensus and not based alone on your personal judgment of what may or should happen. You may turn out to be correct, but the market is bigger than any individual. Bear-Resilient Stocks By contrast, some groups tend to act well in a post-bear market environment, especially if the market drop itself drives prices to incredible levels. Of course, the more unusual the values created, the briefer the opportunity window and the sharper the initial snap-back rally will be. Groups that are recession resistant or perceived as most likely to survive hard times are as follows: Recession-resistant industries (foods, grocers, drugs, utilities); Big names with corporate staying power (e.g., IBM, ExxonMobil, General Electric, P&G, McDonalds); Trade-down concepts, such as low-cost restaurants and discount retailers (recession beneficiaries); Companies in very basic businesses, providing good yields from well-covered dividends; Companies with low price-earnings ratios or low price-to-cash-flow ratios not already otherwise in the above list; Companies at or below book value and with positive earnings per share trend estimates; Companies with low debt-to-equity ratios (perceived as low in risk), or high cash per share; Unleveraged closed-end non-junk-bond funds.
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One of the important considerations here is the degree of government response and its likely effectiveness. Within the list of news-driven market drops are some which, while shocking on their face and damaging to people directly involved, do not have wide economic fallout. Examples are major surprise bankruptcies such as Enron and Worldcom. Not all negative events that can drive market drops are within the power of Washington to contain, however. For example, in 1973 OPEC quadrupled oil prices overnight, from $3 to $12 per barrel. Complain as it might, our government was powerless to reverse the action or to contain the inflationary and dampening effect on retail sales that followed. A recession ensued. The open question at this writing is whether the publics confidence will be shaken badly enough by the financial industry events of recent months so as to cause a recession. Two serious negatives are the wealth effect on consumers already battered by gasoline and food inflation, and the inability to continue using home equity as a cushion for consumption. If broad consensus develops that a recession is inevitable, such thinking will be somewhat self-fulfilling. Investors will need to adjust their hold/sell/avoid (and bargain-buying) lists accordingly. In the past, it was common that industry groups associated with causing the economic or stock-market malaise would clearly be out of bounds as early leaders in the market recovery once the dust had cleared. Ironically, in the case of 2008, it is possible that if the banking bailout is effective (because it must be to preserve the economys infrastructure), then middling to strong large-bank stocks might contradict old norms and become buys rather than sells since they are effectively assured against failure. In the present circumstances, investors would do well to create two separate lists of sell-vs.-hold decisions by industry and individual stock names, depending on how the economic scene plays out. One final aspect that should enter into an investors sell/avoid/hold calculus in the final weeks of 2008: Tax-selling season is here. It could be heavy this year, given the stunning losses from market highs in late 2007.
Donald Cassidy was senior research analyst for Lipper Inc., a Reuters Co., from 1990 to 2006. He recently founded the Retirement Investing Institute, a nonprofit educational foundation, and is the author of five books on personal investing, including Its When You Sell That Counts (now in its third edition). Contact the author at don@R-I-I.org.
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