Having a low-risk stock or two in your portfolio is always a good idea in case the market starts to turn south. While I don’t expect that to happen just yet, there are reasons for concern that, on the surface, look like reasons for optimism. Let me explain.
Last week, just before the start of the Cabot Investment Summit, I received an express mail envelope from a long-time subscriber in Oregon who was registered for the Summit.
Inside was a summary of his investment account, which had gained 43% over the previous six months. (He simply wanted to show me how helpful we had been.)
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Then I looked at my own Cabot Stock of the Week portfolio, which held 19 stock positions. Every one of the positions was showing a profit, with those profits ranging from 4% to 1,165%. The average profit was 95%.
And then I looked at the S&P 500, which was hitting record highs and up 13% for the year— and the Nasdaq Composite, which was also hitting new highs and up 20% for the year.
All told, I should have felt pretty good after all that, right?
Well, I did, but …
I learned long ago that bull markets climb a wall of worry, and I’ve been thrilled over the past 10 months to watch the bull market advance by leaps and bounds, as experts left and right fretted about Donald Trump, about Russia, about North Korea and then about hurricanes.
But now I’m starting to worry.
Donald Trump has crossed the aisle.
Putin has quieted down.
Kim Jong-Un seems to have cooled off.
And the hurricanes are history, with Irma in particular proving far less destructive than feared.
In short, there’s much less to worry about!
Now, that doesn’t mean that the market will just roll over tomorrow; the “worry” indicator is not that simple. But it does mean that from now on, I’m going to be more alert for signs of a stock market top. Also, when selecting stocks to buy for my Cabot Stock of the Week, I’m going to be particularly diligent about ensuring that risk is commensurate with potential reward.
One Low-Risk Stock to Consider
For example, the low-risk stock I added to my portfolio last week is a mass-market consumer brand that’s been around for just 10 years. I’ve never used its services but I’m sure that many of my readers have—repeatedly. The stock has only been public since 2014—and it’s only 40% above its IPO price, so it hasn’t gotten super-expensive.
Analysts are looking at 25% earnings growth over the next two years, and plenty more beyond that as the market for the firm’s services grows and, perhaps, the company expands internationally.
But unlike so many other growth stocks, the stock’s chart has not yet become overbought.
Note the high-volume blast-off in early August when the company not only released a better-then-expected second quarter report but also announced a partnership that would increase their digital footprint further.
And then note the extremely tight trading pattern since, as profit taking by traders has been offset by buying by new investors getting in, like the readers of Cabot Stock of the Week!
Conclusion: This is a low-risk stock that’s not overextended, despite the fact that its fundamental prospects are quite good.
Contrast that with the charts of famous leaders like Apple (AAPL) and Netflix (NFLX) and Amazon (AMZN) and you’ll see what I mean.
Those are the stocks that institutional investors love, in part because they’re very liquid. But when the bull market ends—mark my words—those are the stocks that are going to get hit hardest.
Don’t Expect a Bear Market, but Prepare for One
So a big part of my strategy from here on will be managing risk by avoiding the favorites of the crowd, because I know how fast those stocks can fall when the bear market gets rolling.
Again, I’m not saying that the bear market is rolling yet; this bull market may have many more months to go. But I’ve found it better to act than to react, so that’s what I’ll be doing for my subscribers from here on.
Bottom line, my goal is to keep on guiding my readers to profits—and then to help them keep those profits when the bull market ends.
If that sounds like a good plan to you, you can find more details on joining my happy readers by clicking here.
But don’t delay. Once this bull market is over, making profits is going to get a lot harder!
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