Swapping year-end winners for next year’s winners and still looking for those elusive year-end bounceback candidates.
WASHINGTON, December 9, 2016 – As the Trump-Santa Claus Rally continues unabated in Friday trading, the Prudent Man is once again left scratching his aging head looking for bargains in the stock market. The problem is, most of the real bargains seem to have left the station within a week after Donald Trump’s surprise electoral victory in November.
Chasing stocks that are moving up in this monstrous, rapid-velocity bull move is generally a foolish undertaking. Indeed, we’ve been holding back here for the most part, at least catching shares of Bank of America (symbol: BAC) in the early innings of the current monster rally.
We’ve busied ourselves today snugging up existing positions and quietly, though reluctantly, getting rid of “perpetual” preferred stocks, i.e., preferred stocks that don’t have a specific redemption date. The generally fixed dividends of perpetual preferreds often doom them to significant price declines in a rising interest rate environment, as investors are less willing to pay top price for what are effectively locked-in, declining yields.
Variable-rate perpetual preferreds can do somewhat better in this environment, given that after their initial holding period, their dividends will begin to float up along with those increasing interest rates. But our sample trades in this area—Powershares and Schwab variable rates and TIPs ETFs VRP and SCHP respectively—have been disappointingly anemic thus far, though that could change.
Better behaved are those preferred stocks issued with a specific redemption date, as they tend to hold value in a rising interest rate environment like this one appears to be—so long as their redemption date is no more than 10 years out and, preferably, 5 or less. The issues we bought over the years, however, were bought at a deep discount in the highly-stressed years 2008-2010, and they’re probably too expensive as a group to buy into currently.
Which leaves us, at long last, moving our portfolio away from something resembling pure-yield to something that more closely resembles a good, old-fashioned portfolio of growth and spec stocks.
Our current holdings in vulture capitalist stocks Blackstone and KKR (BX and KKR respectively) continue to move higher as is our too-modest position in long-beleaguered Bank of America (BAC) shares. We’d like to add even more banks, but they’ve gotten away from us on the upside for the present. We can still find consolation prizes in the insurers, although they, too, need to come in a bit. Prudential (PRU) looks good as does The Travelers (TRV), but both of these could get cheaper in any pullback.
We did have the good fortune to pick up a speculative insurer—American Equity Investment Life (AEL) less than a week ago, and it’s already up over 6 percent from where we purchased it. So far, so good. But we’d like to find even more stocks at bargain prices in an environment where nearly all stocks are getting overpriced.
Likely candidates here include the badly beaten techs and pharmaceuticals. We already have positions in Apple (AAPL—of which more anon) and Allergan convertible preferred A (AGN/PRA, your symbol may vary), but are looking for more in this area.
In fact, pharma and tech stocks could prove to be the Promised Land for finding the kind of year-end bounceback stocks we discussed in this column yesterday. These are perfectly stocks that, for whatever reason, have become the victims of traditional year-end tax loss selling, during which active investors dump their losers to offset at least part of their capital gains, thus saving a bit on their next tax bill.
Although it finally broke through long term resistance today, Apple shares could very well be the first on our 2017 year-end bounceback list of stocks even though we already own some shares. Apple continues to coin money. But at the same time, it’s not coining money fast enough for picky investors who, still remembering their old PC-centric trading advisories of the 1990s, have resumed their Apple-hating ways.
Because of this, AAPL has been trading flat-to-down for the longest time, becoming what appears to be the only high-tech stock that’s trading at a price-earnings (PE) ratio so low (12.41) that it’s generally reserved for boring banking and utility shares only. AAPL also pays a 2+ percent dividend—relatively unusual for a tech—that helps get investors through the long-term hold waiting game.
The stock is currently trading at about $114 per share. But if its numbers continue to come in even at normal levels, the stock could hit $130 some time in early 2017. There is also some vague speculation that Apple could get involved in bidding for certain Time-Warner properties, but nothing has been confirmed. All of which, we think, makes AAPL our first year-end bounceback stock.
We’ll be looking at the energy and pharmaceutical sectors next—perhaps the base metals as well. If the promise of Donald Trump holds up, 2017 could be a banner year for making stuff in America, and those base metals and materials stocks could catch a healthy bid.
Stay tuned. But in the meantime, have a great pre-holiday weekend.Click here for reuse options!
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