In my first article for TheStreet back on May 1, I wrote about avoiding widely held stocks, and looking a bit under the radar instead for stocks of today like Dollar Tree (DLTR), Autozone (AZO), Ross Stores (ROST), Monster Beverage (MNST), Tractor Supply (TSCO), and Polaris Industries (PII), etc.
I think that the big wirehouse firms must have a template that they apply to a vast majority of their clients that includes such duds of yesteryear as General Electric (GE), Merck (MRK), Johnson & Johnson, Microsoft (MSFT), AT&T (T), etc., to just name a few. Not that these are not still good companies today, but the stocks have done nothing for years. Take a quick peek at the performance of GE:
Data from Best Stocks Now App
Unfortunately, GE is typical of a lot of large widely-held stocks. It has delivered dismal returns to investors over the last decade. I am fully aware that the S&P has not exactly been scorching up the track over the last 10 years, but that has not kept some very good companies from delivering stellar returns to their happy investors.
Let's just contrast GE's returns with those of Ross Stores:
I wrote about Ross Stores last year.
How about the returns of Dollar Tree:
I wrote about Dollar Tree last year. I have also owned it for almost two years.
I could give many more examples, but I think that you get the idea. Having grown up in San Diego, I remember when Costco (COST) was the hottest retail stock in the market. It was a new concept, people loved it, and the stock soared. I am not saying that Costco is not still one of the great retailers around, I still love to buy my one gallon jug of pepperoncinis there every year when I run out, but the problem is that the company is no longer growing like it once was. When earnings growth slows down, so does stock price appreciation.
Consider that GE's earnings have been shrinking by an average of 13% per year over the last five years. The stock has been going down by an average of 9.3% per year. Ross Stores has been growing their earnings at an average rate of 32% per year over the last five years. The stock has been going up by an average of 32.3% per year during that same time period,its investors, funny how that works!
In my second article written on May 10, I wrote about how the six-month ascent in the market had ended and that the market was starting to rotate. I warned about tired leaders that were giving up the ghost about new leaders that were beginning to emerge. I specifically mentioned three good dividend stocks that have also provided superior capital appreciation to their investors over the years. I also mentioned that they should do well in a choppy market ahead.
Back on May 18, I wrote about "how to avoid crashing as the market rotates." I hope that you took my advice. I mentioned many leaders like Monster Beverage, Dollar Tree, Ross Stores, and TJ Maxx that were still holding up well. I talked about others that were rolling over, and lastly I mention a few stocks again that were rotating up as the market moved down.
I specifically mentioned EFU, which is an exchange traded fund that has a double inverse relationship with the EAFE index. I stated that "inverse funds can come in very handy when the market really starts to rotate like it is now." I also showed how dramatically it had been moving up in overall rank over the last 30 days.
It is important to remember that inverse ETF's like EFU were buried at the bottom of the heap for the seven months leading up to this April. Then they started rising. I suggested at that time that investors consider hedging their portfolios. Again, I hope that you took my advice.
There is nothing wrong with taking advantage of tools that have been created for use during rough patches in the markets. These tools were not around during the Nasdaq crash of 2000-2002. These inverse ETF's were just starting to really become mainstream during the 2008 market sell-off, but I think that the average investor was afraid of them. Now they are widely available to the average investor.
It is important to remember that these are not long term tools. These are not day trading tools. These are tools to be bought when a clear trend is beginning to develop, and sold when that trend is over. I also use my relative ranking system as a guide as to when to buy and sell these very usefuls tools. It also important to check the average daily volume of these ETFs as there a lot of thinly traded ones that should be avoided.
The most vulnerable areas of the market continue to be Europe, emerging markets, and commodities. The rising dollar (UUP) and the falling euro (FXE) are key indicators to watch going forward as they are pretty much dictating how the markets and commodities go on a daily basis right how. As long as the dollar continues to rise, commodities like gold, oil, base metals etc. will continue to fall and vice versa. Equities markets will also fall along with the dollar, especially those in Europe and in emerging markets.
There are exchange traded funds that are inversely correlated to commodities, emerging markets, Europe, and many other vulnerable areas of the economy. I am using EUM right now as a hedge against plunging emerging markets.
You might say, "why not be 100% in inverse funds right now?" Just watch what happens to inverse funds when the least bit of good news, even rumor, comes out of Europe. The inverse funds will get crushed. That is why it makes more sense to me to just have a few of these inverse positions as a hedge right now.
I really don't think that Europe is going to solve their deep, deep problems any time soon. It makes the most sense to me to continue to hang on to leadership stocks that continue to defy the market, pick up some of the new stocks that are rotating to the top of the heap, and have some hedges in place as long as these current trends remain in place. I track about 2,800 stocks on a daily basis. I publish my top 200 list every week. This a good place to start.
Disclosure: At the time of publication, Bill Gunderson was long DLTR, AZO, ROST, MNST, TSCO, PII, EFU, and EUM.