Welcome to the Bull-yahhhhhh report. Where the bull market is king.
Sitting on the side-lines of the stock market? Fearing recession 2.0 aka a double-dip? Worried that the sovereign-debt crisis in Europe might be forming the underpinnings of contagion? Or do you think that the upward trend in gold is based on speculation? Worry not. Here are my tips on how to play the current market. For a second, forget the VIX indicator (the stock ticker for the Chicago Options Exchange Market Volitility Index = general gauge of fear in the market), calm those emotions, and listen to the astute words of the 'wise investor' Axel Rose, "All you need is just a little patience."
Here's my three-pronged approach on how to tackle this economic uncertainty.
(i) Act defensively (50% of portfolio):
Buy large-cap (large cap= large capitalization = (no. of shares * price per share) = a lot), multinational US companies with sound balance sheets, a strong dividend yield and that's recession-proof. The prime example of this type of company is Phillip Morris (Stock ticker = PM). The multinational nature of PM ensures that it's not solely subject to the economic whims of one country so the risk is spread out. It also means that the firm is capitalizing on emerging markets with a growing customer base like China so the growth opportunities are there. The dividend yield (4.4% in PM's case) ensures a steady stream of income and it's a heck of a lot better than the return from any type of savings account, short-term bond or CD. So even if the stock price remains flat, you're still making money. And cigarettes are always in demand, regardless of whether we're in a recession or boom so the stock is recession proof. The stock price has been increasing significantly over the last year and this is largely reflective of Chinese exposure. Phillip Morris is a must have. You don't have to smoke to reap the benefits of a tobacco-based company.
(ii) Invest in China (30%)
China is largely largely insulated from the debt-crises in Europe and is subject to rapid-urbanization which has opened up a myriad of potential customer bases. Whilst the rest of the world is going to shits, China has been experiencing rapid Gross Domestic Product growth, a growing middle-class and increased control of trade and debt around the world. Simply put, China will be the super-power of the world and it's a good time to take a piece of the pie. I recommend Chinese technology companies such as Baidu (BIDU) which is often referred to as the Google of China. China boasts the largest internet-user base in the world and it's only increasing. Baidu recently reached agreements with Microsoft for web-based applications through mobile devices and it's the number one most visited site in the region. It has a strong brand-name recognition and controls a large chunk of the market share. However, there are risks involved in trading in Chinese companies including tight government control and the increased potential for accounting fraud. Also, the P/E (Price-to-Earnings Ratio = stock price/ earnings per share) of Baidu is very high. This implies that Baidu's stock price is relatively expensive but I believe this is largely reflective of growth opportunities.
(iii) Buy American financials trading under intrinsic value (20% of portfolio)
I'll probably get a lot of heat for recommending financials but I recommend buying discounted firms such as Citigroup (C) and Bank of America (BAC). These stocks are trading significantly under book value and although they have the potential to endure even more losses due to the European-debt crises, sour-mortgages and low interest rates, they will be fine once this economic uncertainty has somewhat cleared. Expect prices to rise by at least 5-fold within the next few years and by 100% within the next year. I'll explore the fundamentals and technicals of Citigroup in my next post and explain exactly why this stock is a steal.
Don't give in to the hysteria that's plagued Wall Street over these last few weeks. The stock market may be priced like we're headed towards a recession but economic data and corporate profits are indicating the counter and that's why today is the perfect time to scoop up stock for a nice discount. Don't let your emotions dictate your actions. Let your logic do the driving. Buy when people sell. And sell when people buy. This is the Bull-yahhhh report. Where capitalism is king. And socialism is the devil.
