A worksheet for the perennial worrier
COMMENT HERE ARE SOME SECOND ORDER INVESTING IDEAS TO SEE YOU THROUGH TROUBLING TIMES
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.
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.
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.
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.