A Prescription for Caution

 | Nov 30, 2012 | 1:00 PM EST  | Comments
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I am the first to admit that I was surprised by the market's relatively mild reaction to the dueling press conferences of House Speaker John Boehner and Senate Majority Leader Harry Reid on Thursday. While the third-quarter GDP projection was revised up to 2.7% from the original projection of 2%, it was expected and most of the drivers of the improved results (inventory build, government spending) are unlikely to be repeated in subsequent quarters. In addition, President Obama's opening gambit ($1.6 trillion in new tax revenue, a minor $400 billion cut from entitlements, $50 billion in new stimulus and control of the debt ceiling from Congress) will do nothing to lower the temperature between the two sides in Washington.

I believe investors are too complacent in thinking the fiscal cliff will be resolved in an orderly fashion by the end of the year. Incentives for both sides to take negotiations right to the deadline and probably into 2013 are strong. I believe that when the majority of investors realize this, it will trigger a significant market selloff.

I am being extremely cautious in my portfolio until there is clarity on the resolution of this issue. I am currently around 65% long, 5% short and 30% in cash. I have had a solid, if not spectacular, 2012 so far, with gains in the low double digits and low volatility. I am in no hurry to jeopardize my year in the final month of trading.  That being said, I have a lot of dry powder that I will happily deploy into cheap, solid-yielding stocks should the market slide as I described Thursday.

Investors looking for a cautious investment that should hold up regardless of whatever happens in the next month should consider Walgreen (WAG), the country's largest drugstore chain. A lot of bad news has already been priced into the stock and it offers a good dividend, cheap valuations and improving prospects.

Four reasons WAG is a good value pick at $33 a share:

  • The stock pays a dividend of 3.3% and has quadrupled its dividend payout over the last six years.
  • Consensus earnings estimates for both 2012 and 2013 have risen significantly over the past three months as the company re-signed with Express Scripts (ESRX) and has started to recapture those customers.
  • The stock is selling near the bottom of its five-year valuation range based on price/earnings, price/sales, price/cash flow and price/book ratios. It also sports a cheap five-year projected price/earnings/growth ratio of 0.79.
  • Walgreen is still a good play on the aging of the population, and it should be helped on the margins by the approximately 30 million people that will be covered under Obamacare.

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