Caution Is the Watchword

 | Feb 03, 2014 | 10:00 AM EST
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"Carelessness doesn't bounce; it shatters." --Terri Guillemets

The market has started the new year in a somber mode. The first month of 2014 greeted investors with the biggest monthly selloff since May 2012. I am rather surprised that more investors did not seem to anticipate a high probability of a downdraft in January.

Equities posted double-digit declines at the conclusion of both QE1 and QE2, believing that this time would offer a different fate seem to be trusting four of the most dangerous words in the English language: "It's different this time."

Even after January's pullback in the market, I remain cautious of equities. Turmoil in the emerging markets seems to be accelerating as the beginning of Fed's decision to taper its quantitative easing program is affecting investment flows into a variety of overseas economies.

In addition to keeping more dry powder within my portfolio than usual, I am gravitating toward safe and boring plays when I do buy the dips. Here are a couple of examples of these sort of cautious plays.

Express Scripts (ESRX) is the nation's largest pharmacy benefits manager. It is the type of bulletproof business that should do well regardless or the environment and largely went through the financial crisis unscathed.

The company has more than quadrupled revenues over the past five years. It has grown organically and also through a series of strategic acquisitions including buying huge competitor Medco Health Solutions in the second quarter of 2012. It continues to integrate and gain economies of scale via these purchases.

Express Scripts also continues to benefit from the secular migration to generic drugs, which provide higher margins than name brand compounds. The company should also be a beneficiary when the Affordable Care Act eventually adds to the amount of individuals with insurance coverage.

Despite its continued growth during challenging times and its market leading position within its space, the stock sells right at the overall market multiple. Earnings are on track to continue increasing in the 10% to 12% range annually over the next few years.

It is hard to find a simpler industry or more mundane business model than insurance. This is why I think Allstate (ALL) also makes sense for a defensive investment. The company is the second largest property-casualty insurer in the country and also provides life insurance and retirement products.

The stock has pulled back recently -- a bit like most insurers as interest rates have declined in the new year. The shares are starting to get attractive, as they are trading under 10x forward earnings. It also seems that analysts have been too conservative in estimating the company's earnings power for some time. The company has easily beaten the bottom-line consensus for at least six straight quarters.

Allstate is a perennial 3% to 5% revenue grower, has a solid balance sheet, sells for around 20% over book value and also provides a 2% dividend yield. It is indeed a Good Hands' safety stock.

As NFL fans learned yet again yesterday during the Super Bowl, sometimes a deploying a great defense beats having a good offense. Both of the selections above conform to the adage "Keep it simple; keep it safe." They have low earnings volatility, no emerging markets exposure and reasonable valuations. I think this is the best strategy to employ right now until we see some additional stability in the market. I will be adding both of these equities to my portfolio should the market continue to decline.

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