You've paid the tuition, so I hope you are paying attention.
The 5%-plus drop in the
Dow Jones Industrial Average
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Standard & Poor's 500
that started on Feb. 27 is a lesson in how long-term investors can make low-risk profits in what will be an increasingly risky market.
The problem is that every day that goes by without letting the steam out of the global financial market -- brought to a boil by an excess of cheap capital and even cheaper debt -- raises the odds of a financial market Armageddon.
(Since a number of you have emailed to ask what I mean by Armageddon, I say Armageddon is in the eye of the beholder. To me, if a 10% drop is a correction, a 30% fall in stock prices is Armageddon. And before you pooh-pooh that number as just another crash, remember that if Armageddon is driven by the debt markets, the damage would be worse on that side than in the stock market.)
Of course, we don't know the date of that blowup. If we were certain it was tomorrow, all we'd have to do is move to cash and sit it out. But the blowup could be years away, so in order to have any chance of reaching our financial goals, we have to stay invested despite our fears.
Fortunately, the Feb. 27-March 5 market selloff gives us some clues. Some stocks fell much harder than the market as a whole -- and some did much better. By studying the stocks that either went up when the market went down -- and there are a few -- or held their price better than the general market, investors can find patterns that tell us what qualities this market values most.
Boil down that lesson to a few stock picks, and you have the topic for today's column: 10 stocks that you should own while waiting for financial Armageddon -- and that also will produce the returns you need even if Armageddon never comes.The best way to explain this is to show you some examples of patterns of value that I've found after studying the selloff in the U.S. and other stock markets. So without further ado, here are my 10 for Armageddon:
Armageddon Group No. 1
The cream of the cream of consumer blue chips:
Yes, this is Investing 101, but I don't see any reason to turn up my nose at a strategy just because it's so well known. It works. This most recent downturn proved it -- again.
- When the going gets tough, the not-so-tough run for the safety of consumer blue chips such as PepsiCo (PEP) - Get Report. It's likely we'll all be drinking Pepsi and munching Frito-Lay snacks as the world comes to an end. That's why PepsiCo shares were down just 3% when the market fell by 5%. The upside isn't bad on a stock like this either: 10.7% a year over the past 10 years.
- Let me give you a second well-known name that fits this category: Procter & Gamble (PG) - Get Report. The stock fell just 3% during the market's drop, and shares have returned 11.3% on average for the past 10 years.
- A third name, Kellogg (K) - Get Report, has been on fire since the middle of 2006 and dropped just 2% in the recent selloff. The stock's 10-year average annual return is a relatively low 6.9%, but the five-year number of 13.6% is more indicative of the period ahead.
- My fourth name, Stryker (SYK) - Get Report, is less well known than PepsiCo, Procter & Gamble and Kellogg -- maybe because it makes artificial hips rather than potato chips -- but the performance is even more attractive: down just 2% in the selloff and up 22.5% annually on average for the past 10 years. I'd argue that the five-year return of an average 13.8% is more what investors should expect going forward.
Armageddon Group No. 2
Must-own growth stocks
: You don't have to give up all growth stocks to play it safe, my study of the recent selloff suggests. Oddly enough, a few growth stocks, which should have been more volatile than the blue chips I've noted above, weren't.
- Apple (AAPL) - Get Report, for example, went down just 2% in the period when Procter & Gamble fell 3% and the market 5%. Contrast this performance with that of another technology growth stock, Cisco Systems (CSCO) - Get Report, which fell 7%, more than the market indexes.
- Expeditors International of Washington (EXPD) - Get Report is another growth stock that behaved surprisingly well. It dropped 3%. C.H. Robinson Worldwide (CHRW) - Get Report, another freight-forwarding stock and one that had outperformed Expeditors International in January and for most of February, dropped 5%.
I've got a theory on why stocks such as Apple and Expeditors International didn't fall as much as their growth-stock brethren. Some growth stocks have such strong growth stories and have delivered such stellar returns that they have a big pool of investors just waiting to jump in and buy on the slightest dip. So any pullback, rather than scaring investors out and leading to a bigger drop, brings in new money, supports the price and leads to less selling by existing shareholders.
Apple fits that pattern: The stock has huge mind share among investors and has delivered an average annual return of close to 100% for each of the past three years. With the iPhone due out this summer, individual investors who missed out on that performance are looking for the slightest chance to get in.
Expeditors International is less well known to the mass of individual investors, but the stock is a growth-stock superstar with a legion of fans. Average annual return has been 29% over the past three years and 31% over the past 10 years. I'd add both of these to my 10 stocks for Armageddon portfolio.
Armageddon Group No. 3
Debtors with improving prospects of paying it all back
: If you're willing to put up with some short-term volatility, meaning the stock could go down a fair bit, you can pick up a lot of long-term gains by buying shares of companies with big debt and -- this is crucial -- the future cash flow to pay it down and raise the companies' credit ratings. My two picks in this group for the Armageddon portfolio are:
- Companhia Vale do Rio Doce (RIO) - Get Report, the Brazilian iron and nickel miner that just took on a truckload of debt to buy Canadian nickel producer Inco in a $19 billion deal, fell 14% in the recent market drop, about in line with the 13% decline in the Brazil ETF iShares MSCI Brazil (EWZ) - Get Report.
- Canadian oil sands player Canadian Natural Resources (CNQ) - Get Report, which is leveraging up -- debt-to-equity ratio is now 1.03 -- to expand production and which fell 5% in the dip.
They'll certainly give you more sleepless nights than any blue chip, but as the companies use current and, in the case of Canadian Natural Resources, future cash flow to whittle down debt, the stocks will look better and better in a world that's worried about debt and leverage.
Armageddon Group No. 4
Stocks showing really big growth in dividends
: Contrary to my expectations, I couldn't find any evidence that a high dividend protected a stock from a decline as big as or bigger than that of the indices.
: dividend 4%, decline 5%.
: dividend 4.1%, decline 8%.
: dividend 4.3%, decline 7%.
: dividend 4.5%, decline 6%.
But I did find evidence that a huge and unexpected increase in dividends would not just prop up a stock but actually send it higher, even as the market dropped.
- On March 1, American International Group (AIG) - Get Report announced that, "under ordinary circumstances," it would raise its dividend by 20% a year for the next five years, starting with the May 2007 payout. The market might have been expecting some increase in the dividend -- the company raised it 10% last year -- but 20% a year for five years? At a company that shows annual dividend growth of less than 1% over the past five years? Not a chance that was in the stock price. Shares of American International Group climbed 1% during the market's 5% drop. Dividend increases voted by the board of directors are a sign of extreme confidence in a company's prospects. By going on record with a 20% increase every year for five years, American International Group's board is saying, "We're back," with a vengeance.
- The exact form of the cash payout isn't that important. It's the willingness to part with hard cash that counts. So I'd put Fifth Third Bancorp (FITB) - Get Report in this category. The company just announced it would pay out a $1,400 profit-sharing bonus to every employee. That's a huge announcement from a former banking-sector star that's been down for a long time. It's also a reason the shares fell just 3% during the selloff. Shares, which trade at $39.96 today, peaked just below $70 in April 2002.
Both American International Group and Fifth Third go into my Armageddon portfolio.
One final word on this portfolio: This isn't a buy-and-hold list. You have to actively manage the growth stock picks, the debt picks and the dividend picks -- and you should revisit the blue chips once a year, too -- to make sure that these are still the stocks to ride for solid returns while you're waiting for the bottom to fall out.
Or not, as the case may be.
In a best-case scenario -- no Armageddon despite all your worries -- these stocks and their successors should return enough to get you and your portfolio where it needs to go.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: American International Group, Canadian Natural Resources and PepsiCo. He did not own short positions in any stock mentioned in this column.
Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback;
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