Let’s put in this way. The markets look vulnerable.
We failed to put in a new high during the latest market advance, and it’s very likely that we’re setting the stage for a multi-month downtrend. Please don’t be silly and panic though! The goals of investing are to achieve long-term goals, not for one’s picks to go straight up. Sticking with your long-term plan, however, does not mean “buy and pray” that things will work out.
Here’s what I want you to do right now. Go through each one of your holdings and evaluate their net balance sheet position (i.e. subtract the firm’s total debt from its cash positon). If the firm’s net debt position is massive relative to its market capitalization, it’s probable the firm may face abnormal selling pressure should the market itself come under attack by sellers in coming months. We think credit quality will be the source of alpha during the next few months, and sticking with the highest-quality firms could be a nice source of relative outperformance. Your “consider selling list” should comprise of the most leveraged equities in your portfolio.
Not only do we look weak from a technical standpoint, but many market participants are still digesting the rapid fall in commodity prices from crude oil to copper to iron ore. Where others are panicking, we’re often well prepared. For starters, we haven’t had any energy or commodities holdings in the Best Ideas portfolio during this massive slide, absent a small position in Rio Tinto (RIO), which we still happen to like. In commodity-land, it’s almost a given that we’ll see some dividend cuts, and we’d point to Freeport McMoran (FCX) and Cliffs Natural (CLF) as being the most likely–their debt obligations are huge relative to their cash positions. The market is all but factoring in a dividend cut at Legacy Reserves (LGCY), and we encourage readers to stay away from those 10%+ fantasy yielders.
We’re expecting more pain across the energy sector. Be prepared.