Day two of the slowdown thesis is upon us. On day one, traders buy the highest-growth stocks. That's why we saw aggressive buying in the biotechs and the fastest-rising technology stocks.
Day two? You buy the staples. The companies that won't miss even if the economy stutters, the ones that have much less risk even as they have much less reward, the chicken growth stocks, as I like to call them. You buy the Pepsicos (PEP) and the Kimberly Clarks (KMB) and the Krafts (KHC) and the Eli Lillys (LLY) of the world and accept that you will sacrifice upside for sleep-at-night steady profits. (Kraft is part of TheStreet's Action Alerts PLUS portfolio.)
I like to teach this kind of stuff because I want you to understand why stocks act like they do. So often, we see random moves, stupid moves even, and we think the market's irrational. Take General Electric (GE), which I have been urging people to buy for ages but have accelerated the push since Nelson Peltz, the brilliant activist, got involved to help CEO Jeff Immelt get the most out of his company. This morning, General Electric reports a terrific quarter, fabulous organic growth, great margin expansion and excellent revenues. But the clown headline writers immediately put a negative and ridiculously wrong spin on the sales growth and the stock trades down before market trading. Investors then come to their senses and the stock's off to the races. (General Electric is part of TheStreet's Dividend Stock Advisor portfolio.)
I am not talking about this kind of idiocy when I talk about the rotation I am seeing. I am talking about a seasoned playbook that works, and works all the time because of the committee way that money is run in this country.
Remember the circumstances: The Fed doesn't move because it's worried about a weakening economy. The employment numbers seem to be peaking. Non-residential construction slows down. Commodities plummet. Next thing you know, Wal-Mart (WMT) blows up.
Fast money, hedge fund money, is nimble. These managers move fast. They reach for the stocks with the most risk: Celgene (CELG), Regeneron (REGN), Salesforce.com (CRM), Amazon (AMZN) and the like. They can handle the possible downside and will always jump ship the moment the economy accelerates again. (Amazon is part of TheStreet's Growth Seeker portfolio.)
But big-time money? Mutual fund money? These aren't PT boats. They are battleships. Their portfolio managers meet. They discuss. They kick around ideas. They mull it over. They meet again. And then they decide, pretty much collectively, you know what? The economy could be slowing. Which companies could have good growth in that environment?
Why, how about the food and drug companies, the consumer packaged-goods entities? And which ones are doing best? Let's see, Pepsico just reported a terrific quarter. We know Kraft's being run by smart people these days, maybe we take some of that. Sure, Eli Lilly had a cholesterol drug knocked out of the box, but what the heck, it's got a dynamite anti-Alzheimer's drug and an amazing diabetes drug on the market with fewer heart problems than any other out there. Oh, and how about that Clorox (CLX)? Huge beneficiary of the decline in raw materials. Smart guy at the helm. Plus, in a slowdown we will get a decline in interest rates. Unlike those high-risk, high-reward stocks, these companies have sky-high dividends that give you a much better yield than their Treasury competition.
Voila, you get the rally you are seeing today.
Can it really be that simple? Absolutely. Why doesn't everyone know it? Because who else would bother to open the curtain on the way big money runs?
Now you know. Now you, too, can play the slowdown game for fun and profit. Enjoy!