Stack’s stocks: Defensive value
Jim Stack -- who accurately predicted the financial bubble -- holds a defensive portfolio. However, the editor of InvesTech Market Analyst still sees value in a trio of stocks.
"Most companies face declining revenue and earnings in a recession.
"That’s particularly true this time as the recession enters its second year. In fact, the cumulative operating earnings for the S&P 500, (which exclude one-time write offs) actually turned negative last quarter for the first time in history.
"Earnings will continue to decline in 2009, and forward projections for many firms have been dramatically reduced in recent months.
"While it’s never comfortable to be invested in a bear market, it is more comfortable holding companies that are industry leaders selling at extremely attractive valuations.
"Even taking into account the dramatically reduced earnings component this year, most of the stocks on our model portfolio are selling at less than half their 10-year median valuation levels. This is true whether considering projected 2009 price-to-earnings or current price-to-cash flow levels.
"Microsoft (NASDAQ: MSFT) is a case in point with price-to-sales and price-to-cash flow sitting at 22 year lows.
"The price-to-cash flow value at Walgreen (NYSE: WAG) hasn’t been this low since 1982, and the valuations for Automatic Data Processing (NYSE: ADP) are at levels last seen in the 1990 recession.
"It hurts to see one’s portfolio decline in a bear market, especially one as severe as this. However, we don’t mind holding quality equity investments when these stocks are priced at the lowest level in decades.
"We’re getting a good dividend yield that is far better than money market and we are in a prime position for the next bull market.
"Our defensive allocation and strategy have limited losses to less than one-half that of the major indexes, making recovery easier to achieve.
"With a core of good companies in the portfolio, we are assured of participating when the market does turn higher. And we have a healthy cash reserve that’s ready to deploy once a final market bottom is confirmed."
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