The following commentary was originally sent to Action Alerts PLUS subscribers on Feb. 8, 2016, at 5:18 p.m. ET.
There are no two ways about it: Monday was painful. It stung from before the markets officially opened to the moment they closed.
Although stocks pared their losses in the last hour of trading, the damage had already been done, with the Dow Industrial Average closing over 175 points lower, the S&P off 1.42%, and the Nasdaq down over 1.8%. Materials, financials, consumer discretionary, technology and health care were the worst-performing sectors (in that order), with energy, consumer staples, telecom, utilities and industrials posting the best returns, though on a relative basis.
Within our Action Alerts PLUS portfolio, Energy Transfer Partners (ETP) got hit the hardest, with the selloff driven by news that CFO Jamie Welch had been replaced as well as rumors that Chesapeake Energy (CHK) was involved in restructuring conversations (alluding to an eventual bankruptcy filing). ETP is not directly exposed to Chesapeake, unlike its general partners, Energy Transfer Equity (ETE), which will be exposed following its impending merger with Williams Companies (WMB), of which CHK is a major partner. But several of ETP's counterparties have direct exposure to Chesapeake, though Chesapeake is not a direct counterparty to ETP.
While we believe ETP's results and conference call on Feb. 24 will provide the ultimate litmus test as to the extent of its exposure as well as visibility into its distribution outlook, we expect the stock to experience continued selling pressure between now and then. To put it lightly, we are extremely disappointed by the stock's performance but would reiterate that we did slash two-thirds of our exposure in the mid-$40s back in November and have told subscribers with a short- or intermediate-term horizon to get out multiple times. The position is among our smallest three across our nearly 30-stock portfolio for the very risk and volatility seen Monday.
Moving past ETP, we have identified a handful of "losing" stocks within our portfolio that we would be willing to sacrifice (i.e., at the very least, trim our position) on any bounce or relative outperformance, in the hope of re-deploying that cash toward higher-quality names. Mondelez International (MDLZ) and Starwood Resorts (HOT) are the two names at the very top of our list; we slashed our position in both in recent weeks -- MDLZ following its disappointing 2016 guidance and HOT after shares outperformed the broader market during a recent trading session. We would be willing to exit HOT outright and slash MDLZ considerably the next time shares of either name inflect. Again, there is a reason both HOT and MDLZ represent very small portions of our portfolio.
Another controversial name, Bank of America (BAC), is one we will not be looking to purchase given the extremely negative sentiment that spans not only across the entire financial landscape but even more acutely upon BAC shares. However illogical we view the selling to be, we are not willing to fight the market on this one and are instead in it for the long term. It will likely take eight to 12 months for shares to recover, at minimum, as the bank is a "show me" story and must prove itself through strong stress-test results, continued efficiencies on the cost side, improved capital ratios and strong capital returns.
On the positive side, we would point to American Electric Power (AEP), Costco (COST), Dow Chemical (DOW), Lockheed Martin (LMT) and Starbucks (SBUX) as names that are defensible and thereby investable in the current climate. AEP's safe and stable dividend is increasingly valuable amid the low-interest rate environment, while a variety of specific catalysts and an overarching deregulation story provide multiple upside levers. COST is a resilient name for its scarcity growth, market leadership, wide economic moats/competitive advantages, strong free cash flow generation and track record of consistent execution and growth. DOW has a powerful synergy story through its impending DuPont (DD) merger as well as capital return story via massive buybacks and a juicy dividend. Lockheed is literally defensible in today's environment of rapidly escalating geopolitical tensions while throwing off cash in spades and returning even more of that cash to shareholders via aggressive share buybacks and another juicy dividend. We added to our SBUX position given the company's leadership, scarcity growth value and consistent track record of execution. (Energy Transfer Partners, Mondelez International, Starwood Resorts, Bank of America, Costco, American Electric Power, Dow Chemical, Lockheed Martin and Starbucks are part of TheStreet's Action Alerts PLUS portfolio.)
We will be updating subscribers as we continue to monitor the market's actions and will have a note ahead of tomorrow's open touching upon any overnight news that emerges as well as a number of other stocks that have been battered on which we are conducting thorough analysis as we write. Our goal is to provide subscribers with a constant, fresh stream of access into what we are thinking, especially during periods of extended market tumult.