It may be time to start thinking about high-yielding cyclical stocks that have yet to see a full recovery from the pandemic's deep economic scars. The equities I discuss below will marginally hedge your portfolio against the tech's valuation compression and still provide you with the safe & sizable capital gains potential you are seeking.
The equity markets are getting a break today from the massive three-day tech-driven correction that drove the S&P 500 down 7% and pushed the Nasdaq 100 into correction territory (over 10% decline).
The innovation-focused index leading the dive, aka Nasdaq 100, bounced off its 50-day moving average this morning after testing it before close yesterday, which you can see in my TradingView chart below. S&P 500 future also came down and tested its 50-day moving average after hours last night, only to rebound off it early this morning. The S&P has now come back to its old February highs around 3,400.
We are seeing the classic buy the dip scenario today. After hitting 50-day moving averages on key indices, investors & traders have been buying up this support level. The stock market boost today doesn't necessarily mean that the drop is over. It may just be a pause like you see with any market sell-off. It is never straight down. I recall that I actually made more money on short-term call option trades (betting on upside movement) during the Pandemic crash in March than on put options (betting against the market).
All we know for sure is that fear is back in the market place, and fear means opportunity. The VIX, aka the fear index, surged on Friday to its highest level since the drop-off in mid-June and still sits at a 2 month high.
Going into this November election, I anticipate that the VIX will remain elevated for the next couple months as the markets attempt to find an equitable level amid the political uncertainty.
I'm excited to see more market fear, which we should be able to capitalize on. With the VIX and the S&P 500 at such elevated levels concurrently, we may be in for a crazy couple of months.
Like the legendary Warren Buffett said: "Be greedy when others are fearful."
Opportunity in Cyclicals
Yesterday, I discussed 3 innovation-driven Asian blue chips that are poised to thrive over the next decade in my article: 3 Foreign Tech Picks Amid The Domestic Sell-off. These picks all provided an international hedge for your technology allocation.
Today, I will look at some ways you can hedge your current portfolio against stretched valuation risks, with some cyclical underperformers. These stocks are beginning to regain their strength as the broader economy recovers from the pandemic induced economic coma.
Chevron (CVX - Free Report)
Everyone has been avoiding oil stocks like the plague, with the future of oil being so uncertain, but some of the best-positioned oil companies are poised to provide you with the high yielding returns you are looking for.
Chevron is an oil powerhouse. With its savvy purchases across the Permian and Marcellus basins, the enterprise has established itself as a leader in the growing US oil industry. I dare to call CVX an oil growth stock, but it has all the makings of a long-term winner.
I can assure you that the world economy is far from kicking its oil addiction. Demand for natural gas and oil will continue to rise over the next decade with energy needs, and CVX is poised to drive substantial profits throughout the roaring 20s.
I deem that Chevron 6.5% dividend yeild is almost as safe as US Treasury Note. The oil industry's commitment to maintaining its dividend no matter the financial adversity (short of bankruptcy) is unprecedented, and Chevron has the liquidity to support this yield for some time.
It may take a few years for the firm to come back to old profitability levels with the entire oil industry being oversupplied, but it will get there, and I anticipate it'll do it faster than most of its cohorts.
The financial constraints that the pandemic has caused to the oil industry gives CVX the pick of the litter for any synergy driving acquisitions.
These shares are looking oversold today based on some of my indicators and trading at a share price far below even its most conservative price targets, with an average price target of $102.64 (28% upside).
Goldman Sachs (GS - Free Report)
This profit-driving machine has been able to keep its bottom-line healthy while producing near-record quarterly revenues. You may hate bank stocks, but it's hard to dislike this captain of high finance.
Goldman capitalizes on the market chaos, with its Investment Banking and Trading divisions propelling GS shares past its commercial-banking powered cohorts. In fact, this past fear-ridden quarter illustrated the bank's strongest revenues in over a decade.
Banks have underperformed the broader market because the excessively dovish Federal Reserve's decision to drop rates to 0% (technically 0-25 bps) and keep them there through 2022. This interest rate plunge is weighing heavily on banks' lending margins.
Goldman Sachs' investment banking & trading driven strategy has allowed the firm to come out of this unexpectedly low-interest environment unscathed and ostensibly stronger than ever.
GS remains roughly 19% off its January highs and appears to be just breaking out of its trading rut. These shares have stayed relatively buoyant amid this tech sell-off. I think GS is getting springloaded to blow past its old January highs, especially as M & A and IPO activity begins to heat up.
For those apprehensive investors, remember that GS will not take the same valuation correcting beating that tech is experiencing, and its cushy 2.5% dividend is as good as gold.
NextEra Energy (NEE - Free Report)
This stock will provide you with a strong utility hedge against the broader market with its low 0.2 beta, robust dividend yield, and healthy capital gains potential as a trailblazer in renewable energy.
This enterprise leads the charge in the renewable energy space, and its share price appreciation illustrates this anticipated economic shift towards sustainability. NEE has seen returns of 200% in the past 5 years (more than doubling the S&P 500) while at the same time yielding a healthy 2% dividend. This innovation-driven energy giant has stayed buoyant even amid the pandemic as the world looks towards the future.
The future of NextEra Energy is bright, being the largest global producer of solar and wind energy, a leader in battery storage, and not to mention maintaining a massive backlog of renewable energy projects. In this indefinite low-interest-rate environment that the Fed has provided the equity markets, NextEra's significant future earnings are now worth more today than ever.
NEE is teetering around its late February highs, and I believe it's poised to skyrocket as it successfully fights against the broader market's 3-day pull-back. This is a long-term play on energy, and a small position in this today could pay off over the next few years if you can stomach any short-term volatility.
2020's underperforming cyclical sectors have outperformed both tech and the broader market in the past week, as profits begin to rotate out of valuations stretched tech and into value plays like the industry-leading enterprises I discussed above.
I think now is as good a time as any to take advantage of the rapidly recovering economy in the well-positioned stocks I discussed above.
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