Even if the stock market rally is getting really long in the tooth, there are still plenty of opportunities for investors as well as ways to shelter from a fall in the markets.
James McDonald, CEO and chief investment officer of Index Strategy Advisors (ISA), told TheStreet that a pullback of 7% to 10% could be in the cards because the Dow 20,000 level has been elusive. Still, there are at least a couple areas that are likely to do well.
"I have two sectors that I love for growth: commodities and marijuana," McDonald told TheStreet in an interview.
Interest in the stocks of marijuana companies is on the rise, with more states expected to legalize the drug for medical or recreational use. Last November, the stocks of Nasdaq-listed cannabis companies rallied after voters approved the recreational use of marijuana in California, Massachusetts, Maine and Nevada, while Arkansas, Florida and North Dakota adopted medical marijuana laws.
McDonald says looking at cannabis companies now is "like looking at Apple (AAPL) or Microsoft (MSFT) stock in 1985" in terms of growth potential and returns for investors. Marijuana companies only have been public for a couple years.
"There won't be a joint in every home like there is a computer in every home, but we're looking at a potential $40-$50 billion market cap from zero. I think the returns here (for investors) will be as strong as they were in the first three years of the PC."
A marijuana portfolio that McDonald's investment company built is up around 150% since June.
"There's extreme demand on this portfolio. We get two to three investor inquiries a day," McDonald said.
The portfolio includes companies such as Kush Bottles (KSHB) , OrganiGram (OGRMF) , Terra Tech (TRTC) , and Zynerba Pharmaceuticals (ZYNE) , which are small-caps but liquid enough so that the fund could get out if there was a problem with the industry or sector.
Because they are so small, though, additional prudence is required.
"We move to cash when there's a big announcement coming," McDonald said. "We moved to cash before the votes in November.
"This portfolio covers the full vertical: growers, packagers, dispensers, retailers," he said. "If you want diversified exposure in the cannabis space, this portfolio gives you enough to have acceptable liquidity."
However, for bigger institutional investors such as pension funds, McDonald would recommend they get only indirect exposure to the sector via larger pharmaceutical companies, such as GW Pharmaceuticals (GWPH) , which has a market capitalization of almost $3 billion on Nasdaq where its ADRs trade. Its main stock listing is in London.
Zynerba's market cap of a little over $200 million also makes it well-suited for institutional investors' needs for liquidity, in McDonald's opinion. Indeed, institutional investors already own about 20% of this company's stock, according to publicly available data.
In the commodities world, McDonald's main pick for 2017 is zinc, where he sees "a classic supply disruption and demand growth."
On the demand side, China and India, the main two places where car purchases are growing strongly, new regulatory and corporate initiatives are pushing for rust-proofing for cars, which will need to be manufactured with anti-corrosive underbodies from now on. The anti-corrosive materials contain zinc.
In India, there have been many lethal train derailments, which have been attributed to rusty rail lines, so pressure is mounting on the government to replace them. Those rails also will need to be coated with rust-proof materials, and so will speed rails.
In the U.S., President-elect Trump's $1 trillion infrastructure plan will be sure to require rust-proof steel, so this will boost demand for zinc as well. The price of the metal doubled last year because of these dynamics, but McDonald thinks it will continue rising this year as well.
Meanwhile, on the supply side, an estimated 26 zinc and lead mines closed down last year in China's Hunan province, the center of production, as part of efforts to clean up the environment and are likely to remain shut until June this year. In Ireland, the Lisheen mine closed last year after 17 years of operation.
Apart from these two sectors, McDonald also likes global energy, to which he gets exposure via the iShares S&P Global Energy Sector ETF (IXC) .
Geopolitically, he likes Sweden for its innovation drive and "ability to turn immigrants into productive workers," and Argentina, for its political reform and crackdown on corruption.
McDonald also likes some U.S. blue chips, bellwether companies that he thinks are likely to do well in the first quarter. They include Chevron (CVX) , JPMorgan Chase (JPM) , 3M (MMM) , Boeing (BA) , AT&T (T) and Hewlett-Packard (HPE) . (T is part of the Dividend Stock Advisor portfolio and HPE is part of Jim Cramer's Action Alerts PLUS charitable trust.)