Today’s news:
• Direxion Daily S&P 500® Bear 3X Shares (SPXS) joins the Special Situation & Movie Star Portfolio as a Strong Buy.
• Direxion Daily Semiconductor Bear 3X Shares (SOXS) joins the Special Situation & Movie Star Portfolio as a Strong Buy.
• Blackstone Group Inc. (BX) moves from Hold to Retired.
• LGI Homes (LGIH) moves from Buy to Hold.
GETTING SERIOUS ABOUT A LOOMING STOCK MARKET CORRECTION
Global citizens are beginning to witness a relatively unprecedented situation in which a communicable virus that originated in China is now traveling around the globe. This weekend, we learned that it’s impacting people’s health in northern Italy. I’m not thrilled about that, because my daughter is experiencing the classic “college semester abroad” in Italy right now. As she sent me snapchat videos of Michelangelo’s David from Florence on Saturday, all I could think of was the potential for the crowds of surrounding people to breathe germs upon her. Sigh.
I spent a lot of time thinking about investors this weekend, as well—and stock markets. I can’t do much about you or me breathing germs. I couldn’t even find any disposable masks for my daughter or my 86-year-old Dad, after telling them weeks ago that I would buy and mail masks to them. But what I can do is come up with a few more ideas on how to safeguard your stock portfolios.
As I’ve mentioned in recent weeks, commerce in China has been greatly reduced because people have been quarantined. If they’re stuck in their homes, they’re not going to work. They’re not manufacturing products, selling products, buying products, shipping products; participating in leisure activities at restaurants, movie theaters or theme parks; or taking advantage of common services such as coffee-to-go, manicures or haircuts.
This means that most U.S. companies (and international companies, of course) are going to be selling fewer products and services, and reaping fewer profits, in the months to come. Revenue and profit misses contribute to lower stock prices as disappointed investors sell stocks and search for more palatable alternatives.
You and I own stocks that are going to deliver disappointing news to investors. For example, both Procter & Gamble (PG) and Apple Inc. (AAPL) recently warned investors that first-quarter 2020 results are going to come in lower than originally expected, due to the coronavirus impact on the Chinese economy. We also own some stocks that ostensibly won’t be directly harmed by the coronavirus work-stoppage. However, when stock markets go down, “the baby gets thrown out with the bath water.” (For my international subscribers, that means that good, profitable companies’ stocks will fall alongside shares of suffering companies.)
I’ve been rather wordy thus far. Let me get right to some recommended strategies now.
1. If you’ve been investing on margin, bring your margin exposure under control by selling some of your less-attractive investments. Those might be bonds with incredibly low yields; or shares of stock in companies that are losing money, or simply not growing their profits and revenues annually; or shares of stock that have skyrocketed without experiencing a price correction.
2. Continue to raise cash with which to “buy low” after the stock market has a pullback. Buying low is the quintessential way to “turn lemons into lemonade.” Stocks are going to go on sale. People who use portfolio cash to buy low on stocks generally end up with higher account values than they had when the market correction began.
3. Use stop-loss orders on your portfolio stocks, where prudent. (Consider potential income tax consequences.)
4. Remain calm. Stock market corrections are common. They happen just about annually. And then, stock markets recover.
5. Consider reallocating some of your equity portfolio assets into investments that grow as the stock market falls. I list several such investments below.
6. Importantly, I could be wrong about a pending stock market correction. If you are inclined to purchase stocks that are exhibiting extremely bullish price charts, go for it. As cautious as I am being by raising cash and buying contrarian investments, I am also continuing to personally own stocks and call options on companies like Voya Financial (VOYA) and Brunswick Corp. (BC) and Netflix (NFLX). I’ll continue to reevaluate these positions daily. If my stocks fall for a while, so be it. I will expect them to recover, and I will buy low. If the market does not fall, or if the correction doesn’t arrive for several months, I will still be participating in its upside.
I’m offering you two investments today that you can buy that will theoretically deliver capital gains during a stock market downturn. You will have to do your own risk assessment as to whether these investments are appropriate for your portfolio. If the stock market falls, these investments’ values will likely rise.
Direxion Daily S&P 500 Bear 3X Shares (SPXS) – This exchange-traded fund (ETF) seeks daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the S&P 500 Index. Here’s the investment’s web page. The Direxion Daily S&P 500 Bear 3X Shares (SPXS) ETF joins the Special Situation & Movie Star Portfolio today as a Strong Buy. Strong Buy.
Direxion Daily Semiconductor Bear 3X Shares (SOXS) – This ETF seeks daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the PHLX Semiconductor Sector Index. I chose this technology stock investment because it’s relatively apparent that technology products are mainly sourced in China. If a company can’t produce or obtain its product’s components, it can’t sell those products to consumers. Here’s the investment’s web page. The Direxion Daily Semiconductor Bear 3X Shares (SOXS) ETF joins the Special Situation & Movie Star Portfolio today as a Strong Buy. Strong Buy.
Blackstone Group Inc. (BX – yield 3.1%*) – It’s time for me to retire Blackstone Group from the Growth & Income Portfolio. The stock has delivered unreasonably large capital gains in a comparatively short amount of time, and the price is finally beginning to show some vulnerability. Whether it falls or rises, at this point, is of no consequence to me, because it will be quite a while before the stock’s got a price chart pattern and a valuation at which I can reasonably recommend purchases. Therefore, I’m saying goodbye to this excellent company, which I’ll be happy to re-embrace after a decent-sized price correction. Retired.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.95 and yielding 3.1%.
LGI Homes (LGIH) is the 10th-largest residential homebuilder in America. The company is currently building homes, primarily for first-time home buyers, in 19 U.S. states from coast-to-coast and the District of Columbia. LGI Homes is expected to report $2.34 fourth-quarter EPS, within a range of $2.09-$2.54, and $585.3 million revenue, within a range of $534-$615 million, on the morning of February 25. LGI Homes was featured in the December and January monthly issues of Cabot Undervalued Stocks Advisor.
Analysts expect full-year EPS to grow 9.6% and 13.7% in 2019 and 2020. The 2020 P/E is 12.1. LGIH is a small-cap stock. The stock rose past upside price resistance at 88 in early February to a new all-time high, including increases in each of the 13 trading days through February 20. A pullback to 86 would be perfectly normal. I’m moving the stock from Buy to a Hold recommendation, after this long run-up, and heading into the earnings release. Be prepared for volatility. Hold.