Markets have gone a little bit haywire lately. The coronavirus from China has shocked investors. The rapidly spreading virus has caused thousands of infections and hundreds of deaths so far. Many countries have shut down travel with China for the time being. Airlines, cruise shop operators and other such industries are reeling. And we’re seeing many factory shutdowns in China and the surrounding area. It could be a messy quarter or two for global growth, even if health authorities are able to stop the virus’ spread promptly.
On top of that, things have gone wild with Elon Musk’s high-flying electric vehicle company. Tesla (TSLA) stock shot up from $400 at the start of 2020 to as high as $969 earlier this week. However, shares have gone into freefall, plummeting to as low as $700 in recent trading. Traders have caused many tech stocks to gyrate in sympathy with Tesla’s out-sized moves, which has caused short-term traders a great deal of stress.
So what’s an investor to do? For one thing, don’t panic. These market gyrations may seem wild, but the overall economic picture remains sound and the general stock market has solid fundamentals. It may be tempting to give up on long-term investing and instead try to time the market during times of elevated volatility. But, as North Texas Adjunct Finance professor David Ragan told us, short-term trading has its own pitfalls. Ragan said that:
“A volatile market just means that prices are going up and down … a sideways movement. It doesn’t mean one group of investors will be harmed over another. If long-term investors are punished by a volatile market, it implies that short-term traders profit. However, short-term investors can be harmed as much as long-term investors, perhaps even more so in a volatile market if short-term traders don’t make the right calls.”
Since it doesn’t make sense to try to time the market, what better option is there?
If your portfolio has been too bumpy in recent weeks, it may be time to take a look at some low-volatility stocks that can smooth out your portfolio’s results. Here are seven stocks that could calm down your overall holdings.
If you’re nervous about the volatility in tech stocks, but you don’t want to abandon the sector altogether, give Texas Instruments a look. The blue-chip semiconductor company has built one of the most-diversified and lowest-risk chip businesses out there.
That’s because it makes thousands of different semiconductor chip designs for a wide variety of niche applications. Its most promising field at the moment is in chips and sensors for vehicles, with particular upside as autonomous vehicles take off. However, much of the company’s business is in products that can turn analog data — such as weather — into digital information. This is not as glamorous as making components for the new iPhone, for example, but its products have long lifespans and relatively low competition. This leads to some of the highest gross margins and cash flow in the industry, rain or shine.
As a result, Texas Instruments has turned into a cash machine in recent years. The share price has quintupled, it has raised its dividend aggressively for years on end, and earnings continue to grow. At just 22x forward earnings, it’s reasonably priced for a leading tech firm that has grown earnings per share 23% per year compounded for the past five years.
Oftentimes, investors shun conglomerate corporations, such as Berkshire Hathaway. The thinking is that because a company like Berkshire owns so many different things, the whole is discounted versus the value of its parts. Berkshire owns railroads, power plants, chocolate companies, insurance firms and much more. That’s even before you get to its stock-holdings in other leading American firms such as Apple (AAPL) and Coca-Cola (KO).
Perhaps Berkshire sells for less than what it’d be worth if it were a smaller and leaner company. However, having all those different assets under one roof smooths out volatility a ton. Weakness in any one division tends to be compensated by strength elsewhere. Economic weakness, for example, is likely to hurt traffic on Berkshire’s railroads, while at the same time giving more business to its mobile homes manufacturing division.
Also, Berkshire’s massive cash pile — which has currently built up to more than $100 billion — provides a ton of insulation for the stock. The company will have no liquidity issues in a downturn; in fact, it can put money to work on favorable terms when everyone is panicking. Remember how Buffett got sweetheart deals during the financial crisis? Those were available in large part because Berkshire keeps its coffers full. With a return to market volatility, investors will value Berkshire as a true safe haven.
Johnson & Johnson
Given the uncertainties around the upcoming presidential election, many investors have shied away from the healthcare industry. And that makes sense. In general, sectors such as biotech are risky bets whenever politicians start talking about overhauling things. You may well remember the run-up to the 2016 election, when aggressive comments from the Clinton campaign sent drugmakers’ stock prices tumbling.
Despite the risk, however, healthcare is still worth owning. The demographic tide alone makes it a fantastic long-term bet. The country is rapidly getting older. As more folks retire, and diseases like diabetes become increasingly common, healthcare spending will continue tracking higher. Johnson & Johnson is a safe, low-volatility way to play these trends.
The company has three lines of business, which in and of itself diversifies the company compared to most alternatives. It sells medical devices, pharma drugs and consumer products. Medical devices in particular have benefited from longer lifespans and higher spending on quality of life. J&J’s pharma division has long been a powerhouse. And the consumer products division, while smaller, is largely immune to political and regulatory risks, making it a nice stabilizer for the company overall.
Discover Financial Services
One way to ensure yourself from too much volatility is to buy stocks that are already priced for a pessimistic future. Discover Financial Services falls squarely into that bucket.
The well-known credit card issuer and payment network is trading at just 8.5x trailing and 8.0x forward earnings. That’s way cheaper than rivals like Mastercard (MA) and Visa (V). To be fair, they’re not precisely comparable, as Discover earns profits from consumer lending in addition to running the payment network, whereas Mastercard and Visa take no credit risk.
Still, the valuation gap is huge. At 8x earnings, you’d expect we were in a recession or that Discover was taking large losses on its credit card loans. But it’s not. Profits are high, and according to analyst estimates, set to continue increasing. With robust employment, strong consumer sentiment, and rising wages, that seems like a reasonable assumption.
Discover, with is massive 12% earnings yield, is buying back a bunch of DFS stock. Just since 2012, Discover has reduced its share count from 520 million to 320 million today. That’s massive. And, in turn, puts a steady bid under the stock price, and reduces volatility. In addition to the share buyback, you also get a decent 2.3% dividend yield.
The fear has reached a crescendo for oil and gas companies over the last week. With Tesla stock going up almost every day in recent weeks, traders have gravitated to the narrative that alternative energy is ascendant, and fossil fuels are on their last legs. Prominent media personalities, including CNBC’s Jim Cramer have added to the momentum; Cramer recently urged his listeners to dump their oil stocks, saying that they are “done” and in their “death knells.”
However, the rush to dump oil makes for a great opportunity. Many of the sellers are doing so for political or regulatory reasons — fund managers that don’t want “unsustainable” companies. Regardless of what may or may not be fashionable, however, oil and gas will remain in use. The International Energy Agency, in its 2019 forecast, for example, shows that natural gas demand will be up through at least 2040, while oil demand is expected to keep climbing until at least 2030 and then flatten out after that.
This sets up a compelling opportunity in companies like Exxon Mobil. Sure, many energy stocks have suffered greatly through the current bust. However, Exxon Mobil retains one of the world’s most sturdy balance sheets, giving it the durability to survive short-term issues. Furthermore, its refining and chemicals businesses keep profits rolling in even when oil prices are low. Exxon stock has crushed the market over the long-haul, and investors buying now get a 5.5% dividend yield to further boost their gains.
Speaking of stocks that are not popular with certain types of investors, we have the tobacco companies. Altria, in particular, is back on the radar as shares sold off recently. Altria recently announced a large write-down of its Juul investment, and folks are taking that as a sign of defeat.
But that seems premature. Altria has a win-win here. If vaping picks back up steam, their Juul valuation would recover, giving them a big win in the future. And don’t be too quick to discount this. The Trump Administration has started to back down on previous efforts to crack down heavily on vaping. Meanwhile, despite Altria’s writedown, Juul just raised another $700 million in convertible debt, primarily from existing investors, on reasonable terms.
Even if Juul doesn’t have a great comeback, Altria would be fine. The market for nicotine, overall, remains robust. If politicians, lawyers, or other adversaries defeat vaping, the likely result would be more sales for traditional cigarettes. As it is, MO stock is selling for just 10x forward earnings and pays a more than 7% dividend. It also owns a major chunk of Anheuser-Busch (BUD), giving it exposure to another resilient sector (beer) and providing even more cash flow for the company. The vaping concerns are a great short-term distraction, allowing investors to pick up this high-quality stock on the cheap.
Our last pick profits from the safe profits that come from another, if less controversial vice: hoarding. Americans love to collect and hoard things, and that has led to a fantastic market for self-storage companies like Public Storage. Public Storage is a great defensive pick because self-storage is quite resistant to short-term changes in the economy.
Even in the Great Financial Crisis, demand for Public Storage’s services barely dipped. That makes sense. In fact, given the huge wave of some foreclosures, many folks needed to downsize their living spaces and Public Storage offered a convenient place to leave things in the interim.
The core business is good, and the economic tides favor the company as well. Specifically, low interest rates are a boon for real estate investment trusts in general. Investors primarily value REITs based on their dividends, and as bond yields go down. REIT yields tend to go down as well, as a result. And, you may recall, for yields to go down, prices have to go up. PSA stock, for example, would move up from its current $223 price up to $265 once investors decide that the stock should yield 3% in this lower interest rate environment (it currently yields 3.6%).
On top of that, self-storage was overbuilt in recent years, but the glut appears set to wind down. This, in turn, should allow Public Storage to raise prices, and use the extra cash to boost the dividend payout further for its shareholders.
At the time of this writing, Ian Bezek owned TXN, BRK.B, JNJ, DFS, XOM, PSA, and MO stock.