The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning. --Charles Tremper
Crimea votes to secede from Ukraine and return to Russia. The growth trajectory in China is murky and causing commodity and commodity stocks to sell off. Sharply decelerating economies are merging with upcoming political elections in major emerging markets of India, Brazil and Turkey.
There are no shortages of geopolitical and global economic concerns for investors to digest right now.
Domestically, monthly jobs created in the first three months of the year have slowed to less than 130,000 from more than 190,000 per month in the back half of 2013. Other economic reports seem to be pointing to a slowing U.S. economy. Some of this can attributed to the worst winter conditions in two decades throughout most of the country in the past few months. But exactly how much the weather has affected the economy is still uncertain.
After the huge 30% plus rally in 2013 driven primarily by growth stocks, I don't think there is anything wrong with shifting gears and moving down the risk ladder. I believe high-yield/low-beta stocks and sectors are the way to play the market until investors get a clearer picture of the domestic and global direction.
I have become more intrigued by Microsoft (MSFT) recently. It has its first new CEO in more than a dozen years and has given a board seat to ValueAct, an activist fund that owns a stake in the company. The stock has a low beta of 0.7 and other attributes that are comforting to investors seeking safety. Microsoft has a pristine balance sheet with over $60 billion in net cash and marketable securities, which represents 20% of its market capitalization. The company sports one of four "AAA" credit ratings in the S&P 500. Microsoft also yields 3% and has hiked its payout impressively over the past few years.
Despite its stodgy image, the company has two cloud businesses (Azure and Office 365) with more than $1 billion in annual sales and growing exponentially. Server software and Windows license revenues are growing in the low teens. The stock is selling at an approximate 20% to the overall market multiple based on the forward price-to-earnings ratio.
I continue to be a believer in real estate investment trust American Realty Capital Properties (ARCP). Its recent merger with Cole Real Estate Investments (COLE) made it the largest single-tenant retail REIT in the country and should produce significant economies of scale. I also applaud the company's recent decision to spin off $2.2 billion worth of shopping centers into a separate entity. This will simplify the business and increase its overall dividend yield to roughly 7.3% from about 7% according to management. The shares trade at an approximate 20% valuation discount to American Capital's two biggest competitors, even though ARCP provides a significantly higher dividend yield. I believe this discount will continue to narrow over time.
For investors willing to move climb a bit on the risk ladder and don't mind a bit more complexity at tax time, energy master limit partnerships make sense. I continue to like Atlas Resource Partners (ARP), even as it is up nicely since the last time I profiled it in December. Atlas is a limited partnership active in oil-and-gas production in the Barnett Shale in Texas, the Appalachian Basin and in the Mississippi Lime region in Oklahoma. It is a favorite of famed value investor Leon Cooperman. The shares yield just over 10%, and Atlas has raised its payout some 40% since it went public in 2012.
I believe it is important for investors to remain in the game while we go through this period of uncertainly. There's nothing wrong with moving down the risk ladder a bit right now.