For the past few months—just like investors all over the world—the Cabot analysts and editors have been discussing this bull market, elevated stock valuations and the potential for further stock market volatility.
And while none of us claim to be market predictors, we’ve all been investing for many years, and have lived—and profited—through lots of market cycles. Consequently, we’ve learned that investors can make money in any market, good or bad.
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Anyone looking at the following chart can be very thankful for this long bull market and all the opportunities for profit that we’ve taken. But—while we make no market forecasts—after such an impressive run, even big institutional investors are reining in their bullishness (Goldman Sachs is calling for 3% annual returns for stocks over the next decade, for instance).
Will that call prove to be right? Nobody really knows.
But generating sustainable, long-term, inflation-beating returns means staying invested in a wide range of market conditions.
With that in mind, I’d like to offer a few “tried and true” strategies that have helped investors make money in any market.
Bottom line, I think the most important line of attack during periods of uncertainty is this: Buy fundamentally strong stocks that:
- Are undervalued in relation to their peers
- Have excellent cash flow, with most of it derived from their primary business
- Are not burdened by too much debt, so they remain flexible in seeking new opportunities
- Have more buyers than sellers, creating momentum in their share prices
- Enjoy rising moving averages.
Second, I look for companies that have strong catalysts that are likely to boost share prices, including:
- Insider/institutional buying
- Analyst upgrades/initiations
- Operate in an industry with lots of mergers & acquisitions, and who may be a prime candidate for a buyout
- Spin-offs, which can cause both the parent and spun-off prices to rise
- Stock buybacks, which while usually temporary, can give a lift to prices
- Special dividends, which often boost prices, but offer the second benefit of increasing your gains
- Evidence of a turnaround, with long-term earnings and revenue implications
- Earnings and revenue triggers, such as new product lines, drug discoveries, rising market share, etc.
Once you fill your portfolio with stocks that have great potential, be sure your holdings are diversified by market cap and industry, set your mental or actual stop losses to protect your profits, and remain disciplined in your buying and selling approach.
And, should Goldman Sachs prove right, here’s one last thought to keep in mind. Research indicates that historically, the following sectors have been the winners during down markets. I don’t think you’ll be surprised to see that they are primarily what analysts call “defensive industries.” It may be a good tactic to add a few to your portfolio on the down days—just in case volatility rears its ugly head once again.
- Soft drinks companies
- Major pharmaceutical companies
- Food producers
- Major oil companies
- Basic household products companies
- Incumbent telephone companies
- Tobacco manufacturers
- Electric utilities
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*This post is periodically updated to reflect market conditions.
