The stock market took a beating during the first half of the month on troubling signs of a weaker global economy, conflicting views on the timing of looming rate hikes by the Federal Reserve and a stronger dollar. It stopped just shy of a 10% correction before finding a bottom and then rallying back strongly for the rest of the month, driven by good corporate earnings reports and highly accommodative central banks.
My strategy is to embrace volatility, and that is exactly what I did during the first half of the month as I put more of my fund’s capital to work at advantageous entry points. Specifically, I bought Exxon Mobil, JPMorgan Chase and Wells Fargo.
The large, integrated oil companies are trading near all-time low valuations due to the recently falling price of oil, declining production and increased capital spending. Yet Exxon and Chevron (which my fund also owns) have diversified operations that can ride out wild swings in commodity prices (for instance, their refining businesses benefit from lower oil prices). This stability and quality is evidenced by the fact that both companies have raised their dividend every single year for the last twenty-eight years.
As to my bank purchases, six years after the financial crisis the large banks are safer and more financially sound than ever before. Even so, I focus only on the very highest quality names within this group. These companies are immensely profitable with massive deposit bases representing low-cost and stable access to capital. At some point when interest rates rise, they will become significantly more profitable. They should also soon benefit from reduced legal and regulatory costs that have been extreme of late.
Even after these purchases, I remain conservative and cautious with a very large cash balance. In a long uncorrected market at full valuations, cash protects my fund in the event of another selloff. It also allows me to seize opportunities as they arise, just as I did this month. Nevertheless, my goal is for the fund to be fully invested and cash is simply the residual that reflects the fact that there are not enough suitable stocks presently available using my disciplined standards.
Having managed money professionally through both bull and bear markets, one attains an appreciation for just how powerful both of them can be. As such, my strong desire to increase the invested portion of my portfolio is balanced by my insistence on the complete package in terms of valuation and quality.
~~Michael Berlin can be contacted at firstname.lastname@example.org and at (631) 629-4928 .
The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.