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Strategic Investments in the Current Market: Four Plays That Defy A Market Meltdown
by Louis Basenese, Advisory Panelist, The Oxford Club
Wednesday, July 12, 2006: Issue #557
After the market corrected in May and June, headline after headline popped up about the dreaded “R” word: recession
ABC News suggested Bernanke’s biggest challenge was “avoiding a recession.” Forbes made no bones about its stance when it declared “Recession Dead Ahead.”
Even The Wall Street Journal ran an article exposing why 56 economists felt one misstep or unexpected event could “throw the U.S. economy completely off track.”
So should we believe all the hype and put all our capital into cash? Hardly.
Instead, I’d rather rely on some time-tested, fundamental rules of investing. So in today’s issue, let’s review four strategic investments poised to succeed in the current market.
How To Profit In Any Market Condition
Not long ago, I read a piece that calculated the average informed investor will be exposed to more than 40,000 investment “tips” this year. No doubt, almost each and every one is based on some fanciful hunch of where the market might be headed, and how it could possibly make stock XYZ the most unbelievable investment.
Instead of counting on such varied information, I suggest an approach that’s proven to succeed no matter which way the markets move – up, down or sideways.
And that’s simply to accept the fact that economic forecasting adds little value. And that market timing strategies are, for the most part, destined to fail more than they win.
The way to go is an investment strategy that embraces the uncertainty in financial markets and defends against it with:
- Diversification
- Asset allocation
- Portfolio rebalancing
- Position sizing and, most importantly
- Buying quality companies with steadily improving earnings
In the long run, a company’s earnings will be the ultimate determinant of share prices, not the economic forecast du jour.
Today’s Strategic Investments
Here’s a quick rundown on the sectors set to profit in the current market environment:
Commercial Real Estate:
While the residential market is finally cooling off, the opposite is true for commercial real estate. According to a survey conducted by Kingsley Associates (an industry-leading consulting firm based in San Francisco), in 2005 more than $50 billion in new institutional money was allocated to the sector. Even more promising: In 2006, Kingsley expects another $59 billion of new capital inflows.
Consider REITs in the commercial real estate sector. The outlook is too favorable to pass up.
Health Care:
One way to consistently make money in good times or bad is to simply focus your investments on companies that aren’t sensitive to the economy. Health care fits the bill
Health care stocks, as measured by the Health Care Select SPDR (AMEX: XLV), are up 20% over the last six years. (The S&P 500 is up less than 7%). And from January 1, 2000 to May 12, 2002 – during the last bear market – XLV shed less than 3%, while the S&P barreled lower by more than 28%.
The Health Care Select SPDR is one way to capture the broader health care market – from pharmaceuticals and equipment to biotechnology and hospital services. Take a look at the fund’s holdings, too, for a good place to start doing homework on individual stocks. (See today’s Crib Sheet for a direct link to XLV’s holdings.)
Gold:
After hitting nearly $730 an ounce, gold corrected back down to under $580 in just over a month. It has since crept back up to $648 at this writing. And should continue to move higher. Here’s why
Not only is it used as an inflation hedge and in government reserves around the globe, consumer and manufacturing demand for gold is rising worldwide, especially in the fastest-growing markets – India and China. And gold’s gaining popularity as an investment vehicle, too, as the returns in large-cap stocks and investment-grade bonds have investors looking elsewhere. What’s more, adjusted for inflation, gold is nowhere close to its all-time high of $850 set in 1980.
China and Japan:
China’s middle class has welcomed 200 million new members this year alone, roughly two-thirds the size of the U.S. population. And with double-digit GDP growth rates, the trend is only getting stronger.
Japan, already the most advanced Asian economy, offers plenty of upside, too. The country is undergoing serious banking reforms set to unleash more than $100,000 of investable cash for every man, woman and child. After a decade of negative stock market returns, most of this capital is sitting in low-yielding bank deposits. Even a small fraction of these assets returning to the equity market could give it a serious jolt.
Be sure to check out low-cost Exchange Traded Funds (ETFs) with substantial holdings in both of these countries. For a good place to start, try www.etfconnect.com
As Yogi Berra once wisely remarked, “It’s tough to make predictions, especially about the future.”
So, let’s just abandon them altogether. Even the best economists have little clue what lies around the next corner for the economy. In the end, shares prices will ultimately follow earnings. And the companies listed above (and those in our Trading Portfolio) represent the best opportunities available.
Good investing,
Lou
Today’s Investment U Crib Sheet
- Commercial real estate, health care, gold, China and Asia will no doubt deliver substantial returns, no matter what the stock market hands us And The Oxford Club is setting up for long-term appreciation with specific recommendations is each of these sectors. At this writing, they are all profitable and so are the rest of the Club’s 29 positions in the Trading Portfolio. Find out more about the Club – and how to join.
- Johnson & Johnson, Pfizer, Amgen, Merck, Guidant, St. Jude Medical Check out the complete holdings of the Health Care Select SPDR (AMEX: XLV).
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In addition to being the foremast expert on small-cap stocks, Louis is also well versed in special situations including IPOs, mergers and acquisitions, spinoffs and contrarian investments. His commentary has been featured in several media outlets, including MarketWatch. And he's also a top-rated speaker at financial conferences throughout the country. 
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