Is it time to start taking a defensive posture in your long-term stock portfolio? My answer is an unequivocal "YES!" Here's why:
The stock market has plunged and soared -- both by 660-plus-points -- with a major dip in February and a surge earlier this week. Battered by devastating news of trade wars and tariffs while buoyed by massive tax reform and surging economy, the market has gone psychotic.
Despite the mind-blowing longer-term uptrend, the Dow Jones Industrial Average is down around 2% in 2018. Dow theorists are exclaiming that the bearish Dow Theory signals are incredibly close to firing.
Also, extreme volatility, which the market has seen this year, often signals a major market turn.
Remember, it takes a 20% decline from the highs in the major averages to define a bear market. Smart investors start to prepare long before a bear market is officially declared.
Indeed, the bull market can easily resume pushing stocks to all-time highs once again. In fact, I firmly believe we have until at least September until the bear market starts in earnest.
However, starting to move your capital into stocks that should best weather a market downturn is a wise move.
I screen for bear market stocks in three ways. The first way is non-cyclical defensive stocks, such as utilities and consumer staples. Next, I like exchange-traded funds (ETFs) tied to currencies, like the U.S. dollar or commodities. Finally, and this may surprise you, I look for large companies that have taken a beating during the bullish times.
Let's look at each of these three bear market positions and drill into a stock fitting each one.
1. Defensive Stocks
This sector includes stocks like utilities and consumer staples that tend to pay a steady dividend and exhibit lower relative volatility than other market names. Be sure not to mix up defense stocks with defensive stocks in your research. They are entirely different animals.
Defensive stocks often lag the market during bullish runs and outperform during bearish periods. Their beta is usually around 0.5, meaning they will drop less than the market during plunges and underperform during bull runs.
My favorite defensive stock for the coming bear market is Kraft Heinz (Nasdaq: KHC). The stock fits both as a defensive stock and as a stock that has been beat lower -- our third bear market search criteria.
Having grown up in Pittsburgh, touring the factory on elementary school field trips, Heinz has always been close to my heart as a company. Not to mention its products being in every restaurant and likely every home in North America.
However, shares have suffered from a 22% plunge in 2018 and an over 33% decline in the last 52 weeks. Talk about a beaten-down consumer defensive stock!
A $74 billion market cap, a 4%-plus dividend yield, and billions of dollars more in consumer goodwill -- thanks to its multiple household name brands -- make this company one to buy at the present discounted share price.
Although shouldered with a substantial debt load, behemoth investors like Warren Buffett's Berkshire Hathaway and 3G Capital own significant stakes in the company, proving its worth despite the debt issues.
What I like here is the fact that 3G is actively searching for acquisitions for Heinz to help settle the debt. Recently, an attempt was made to acquire Unilever, and I fully expect these acquisition forays to continue until a suitable target is captured. Some analysts have gone as far to say that monster Coca-Cola (NYSE: KO) may be being seriously considered!
Next, emerging markets remain fertile ground for Heinz's stable of favorite brands. Around 70% of sales are made in the United States opening up colossal opportunity to ramp up emerging and other foreign market exposure for the brands.
Finally, cost-cutting initiatives are underway that will further help the share price over time.
Getting long in the $60.00 per share zone with stops at $48.93 per share and a target price of $82.00 makes sense for this bear market pick.
2. Currency ETFs
I like bullish ETFs tied to the greenback during times of bearishness in the overall stock market. We have entered an economic regime of rising interest rates. There is no question that rates are going higher. The only legitimate questions are how high, how fast, and how long will the rate increase continue.
Higher rates mean a stronger U.S. dollar therefore ETFs, such as PowerShares DB US Dollar Bullish Fund (UUP), should outperform during rising rates irrespective of the overall stock market.
I love the non-correlated nature of the U.S. dollar bullish ETFs during bear market periods with rising rates.
3. Bull Market Beatdowns
Buying beat down stocks may seem counterintuitive at the start of a bear market. However, my experience has shown that bargain hunters go into overdrive during bear markets snapping up discounted stocks.
In this category, Mattel (Nasdaq: MAT) strikes my fancy as a good stock for the coming bear market or for whatever happens next.
Shares are off by nearly 50% in the last 52 weeks, and the company has a massively adverse return on equity (ROE) and net margin despite a market cap of $4.5 billion and revenue nearly the same.
Despite the dire numbers, I, like Mario Gabelli, firmly believe this company will soon make a turnaround.
Not to mention the fact that the technical chart is clearly indicating a bottom. A giant double base exists between November 6, 2017, and March 20, 2018, where shares bounced in the $13.00 zone.
Buying now in the $13.20 per share area with stops at $9.07 and a target price of $25.00 per share may be the best trade of the next few years.
Risks To Consider: No one knows the future. Defensive, bull market beatdowns, and even U.S. dollar-tied stocks, can crater during bear, or any other, market conditions. The rule to always use stops and position size properly is even more critical during bear market periods.
Action To Take: Consider starting to prepare for the coming bear market by shifting your holdings and/or going partially to cash in your long-term stock portfolio.
Editor's Note: There are exactly 10 buy-and-hold stocks that can double your market gains in 2018... just as they have for the past three years. Click here for the full report.