The stock market did a great job in January of getting investors to focus on the energy sector when they should have been looking at the good, old-fashioned Dow Jones industrial average.
In the last two months, energy stocks have become serious dogs, and the Dow has posted a series of five-year highs. They don’t ring a bell, folks. This stuff just kind of creeps up on you.
The market prefers subtlety. It rewards hard work, patience and the willingness to go against the herd. The Dow Jones pushing up to five-year highs is now obvious news. The best risk-reward scenarios never lie in the obvious. I am not talking about the best returns here. I am talking about the best risk-adjusted returns. You can try to bottom fish on Google at $345 a share and watch it go to $400, but it can just as easily slide to $250. I am looking for stocks that can easily go from $20 to $25, but it would take a great deal of effort to drop them to $18.
A variety of screens I use have been turning up consumer staples as a strengthening group lately. These are boring stocks in the food and beverage industry. Companies like Pepsi Bottling Group, Del Monte Foods and Colgate. There is also a way to back into this group using XLP, which is an exchange-traded fund.
The group hit a rally high last week, but no one is talking about it. Options activity is showing increasingly higher levels of doubt in the face of higher prices, which is bullish for the group. Now that price momentum is beginning to kick in, there could be something in store for these stocks.
The Federal Reserve has been jacking interest rates for almost two years, and now longer-term rates are starting to rise. This is already taking the air out of the housing bubble, and it seems as though other areas will see some kind of a slowdown. When stocks look as though they might go down, investors get defensive. On Wall Street, getting defensive means buying defensive stocks like consumer staples. And wouldn’t you know it? That’s just what we are seeing.
The general stock market topping process that began a few months ago is still a work in progress. And the supposed outperformance of consumer staples stocks is the same. I do not expect doubles or triples out of these stocks. More like 10-percent to 15-percent returns in the near term while the market completes its topping process. And these stocks will not go up if the rest of the market gets roughed up. They simply won’t fall as much as the average stock. But on a riskadjusted basis, consumer staples look like a solid opportunity.
Back to the mighty Dow. With fresh five-year highs upon us, underinvested people are trying to catch up. This will serve as a catalyst to further boost prices in the near term. But the environment is getting riskier every day. Loading up on stocks today could yield a temporary profit, but within a few months it could disappear. A good strategy for the current situation is to buy only the best-performing stocks in the market. Do not attempt to find a bottom on the Googles and Apples of the world. And if there is anything you own that isn’t working (like housing stocks), get rid of it.
Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at firstname.lastname@example.org.