A worksheet for the peren­nial wor­rier

COM­MENT HERE ARE SOME SEC­OND OR­DER IN­VEST­ING IDEAS TO SEE YOU THROUGH TROU­BLING TIMES

National Post (Latest Edition) - - FINANCIAL POST - Pe teR ho dson Fi­nan­cial Post Peter Hodson, CFA, is founder and head of re­search of 5i Re­search Inc., an in­de­pen­dent re­search net­work pro­vid­ing con­flict- free ad­vice to in­di­vid­ual in­vestors.

If we have learned any­thing over the past 30 years in the in­vest­ment in­dus­try, it is that in­vestors like to worry about things. This was high­lighted, again, with dis­cus­sions we had with hun­dreds of in­vestors re­cently at the World MoneyShow Toronto, which we at­tended last week. We high­lighted a few in­vestor con­cerns in an ear­lier col­umn. This week, we will pro­vide some pos­si­ble so­lu­tions to some in­vestors’ is­sues in two steps: an ob­vi­ous course of ac­tion, and then, a bet­ter one.

EQUIFAX AND FIC­TION

Equifax ( EFX on NYSE) got sim­ply crushed in the past week fol­low­ing news of a se­cu­rity hack. Of course, the fact that the com­pany knew of the breach months ago did not help in­vestor sen­ti­ment to­wards the stock much. With the ( pre­vi­ously) $ 147 stock now trad­ing be­low $ 100, some in­vestors are look­ing to the stock for a nice bounce, be­cause “surely the is­sue is now re­flected in the stock price.” Maybe, maybe not. One course of ac­tion is to buy EFX. But a bet­ter course of ac­tion might be to buy Check­point (CHKP on NAS­DAQ) or one of the other soft­ware se­cu­rity com­pa­nies. Equifax will not be the last com­pany to be hacked, and the grow­ing need for se­cu­rity will lead right into faster growth for the se­cu­rity sec­tor. CHKP trades at 22X earn­ings, up 34 per cent this year.

THE LONG AND THE SHORT

In­vestors re­ally do not like short sell­ers much. They are a fact of life for in­vestors, though, so you might as well ac­cept them. Some in­vestors specif­i­cally look for com­pa­nies to buy in an­tic­i­pa­tion of a “short squeeze,” hop­ing that tons of short sell­ers cov­er­ing po­si­tions at once will ( one day) drive up the price of a stock. For ex­am­ple, right now, on JC Penny (JCP on NYSE) 49 per cent of the public float of stock has been shorted. If there is any good news from the com­pany, a short squeeze is pos­si­ble, and some in­vestors are play­ing that game. But, all we re­ally have is a strug­gling com­pany with a lot of debt, and shares are down 48 per cent this year. Rather than “fight” short sell­ers, we would sug­gest sim­ply buy­ing a bet­ter com­pany rather than play­ing the short squeeze game. Ama­zon ( AMZN on NAS­DAQ) for ex­am­ple, is a pow­er­house. We imag­ine short sell­ers are afraid of short­ing it, as re­flected in its short po­si­tion of just 1.2 per cent. In­stead of buy­ing a bad stock and hop­ing it gets bet­ter, just buy a good one.

OVER- RATED

In­vestors have seen sev­eral rate in­creases now, both in Canada and in the US. Most are won­der­ing how to pro­tect their port­fo­lios from this trend, and are look­ing at var­i­ous op­tions, such as float­ing rate pre­ferred shares and re­set pre­ferred shares.

We have noth­ing against these se­cu­ri­ties ( although when rates fall they can be ugly, such as what oc­curred in 2015) but a bet­ter course of ac­tion might be to buy in­sur­ance com­pa­nies’ shares in­stead. When rates rise, in­sur­ance com­pa­nies find it eas­ier to match as­sets to li­a­bil­i­ties, and the sec­tor’s earn­ings ( and stock prices) tend to rise. Sunlife ( SLF on TSX) Man­ulife ( MFC on TSX) or Amer­i­can In­ter­na­tional ( AIG on NYSE) might be good bets here.

CRASH AND CASH

In­vestors, no mat­ter what mar­kets are do­ing, are per­pet­u­ally con­cerned about a mar­ket crash. Mem­o­ries of 2008, 2011, 2010 and other crashes or mini- crashes are still fresh in many in­vestors’ minds. Many in­vestors seek out hedge prod­ucts to pro­tect them­selves, such as ProShares Short S& P 500 ETF ( SH on NYSE). SH will rise as the mar­ket falls. As hedge prod­ucts go, we would con­sider it OK con­sid­er­ing weaker al­ter­na­tives. But a bet­ter op­tion for scared in­vestors is sim­ply to hold more cash. Cash does not cost you any­thing, whereas SH has an­nual fees of 0.89. Cash does not go down, whereas SH has a 5- year an­nu­al­ized re­turn of neg­a­tive 14 per cent. In ad­di­tion, cash pro­vides the max­i­mum flex­i­bil­ity, and can be uti­lized any sec­ond. Prod­ucts like SH may not even be (neg­a­tively) cor­re­lated prop­erly to your own port­fo­lio. If you are wor­ried, just raise cash.

NORTH­ERN EX­PO­SURE

Ev­ery­one seems wor­ried about North Korea these days, but we might re­mind in­vestors that this has been a worry for more than a few decades al­ready. There is not much one can re­ally do about it, so from an in­vestor stand­point we would just con­tinue with the sta­tus quo. One so­lu­tion might be to sell ev­ery­thing, just in case. But hold­ing no in­vest­ments at all, for five, 10, 15 years or more can do se­ri­ous dam­age to one’s net worth. Plus, in a real nu­clear cri­sis, is money go­ing to even mat­ter? Why not, in­stead, try to profit. Com­pa­nies such as Aerovi­ron­ment ( AVAV on NAS­DAQ) might be worth own­ing. T he com­pany makes un­manned drones, and re­cently re­ported a very ro­bust quar­ter. Whether due to North Korea or not, the com­pany’s shares are up 111 per cent in the past year. We are not en­dors­ing the mil­i­tary, but you might as well profit from it.

MICHAEL NAGLE / BLOOMBERG

Af­ter Equifax got crushed on news of a hack, some in­vestors are look­ing to the stock for a nice bounce, notes Peter Hodson, but a bet­ter bet might be the se­cu­rity sec­tor.

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