So what is an investor to do in a market like this. Be a trader? That's what I do. Maybe not so easy for those doing something else occupationally. I get that. Not everyone is on top of the market 17 hours a day. It does make sense, if we have entered into a new monetary environment, that stocks trading at multiples of sales rather than at multiples of earnings would be the first casualties. That said, how many times have we seen the S&P 500 or the Nasdaq 100 under pressure, sometimes severe pressure, only to make record highs once again, and in relatively short order? Without looking it up, I would say at least a couple of times a year.
If one has listened to me lately on Twitter Spaces or reads me often, then they know that I had mentioned several times going into December that I wanted to stay "skinny" and trade more than invest. They know that I have been warning that January, since the turn of the millennium, has been a negative month for stocks, and most years, we are not dealing with monetary policy that is trying to evolve from loose to tight more quickly than policy makers probably want to move the needle as consumer level inflation ramped much higher than anyone anticipated.
As an investor coming into the new year, I decided to focus on four specific areas for different reasons. These "baskets" are the semiconductors, where I feel there is inelastic demand for what they sell. Core holdings here are Nvidia (NVDA) , Advanced Micro Devices (AMD) , Marvell Technology (MRVL) and Lam Research (LRCX) . This basket has admittedly been getting its tail kicked so far in 2022. I obviously failed to include a memory name. That said, I am still up gigantic percent on all four of these names, so I am not about to panic.
The second basket is the banks. This basket includes core holdings Wells Fargo (WFC) , and Bank of America (BAC) for their overweight reliance upon traditional banking and net interest margin as yield spreads expand. I also remain long JP Morgan (JPM) as something of a hedge. JP Morgan is the "best in class" bank in my opinion, that also maintains very large businesses in trading and investment banking. This basket is doing very well relative to the broader marketplace.
The third basket would be aerospace and defense. Why? Because there will always be bad guys, and the U.S. is still in a position to be able to defend itself as well as allies in need. We just can not let our guard down. Core names here are Lockheed Martin (LMT) , Northrop Grumman (NOC) , and Raytheon Technology (RTX) . The world will need more tanks, more drones, and more fighter aircraft. The U.S. needs to spend a lot and spend quickly on developing both offensive and defensive hypersonic capabilities. Almost nothing is more important in the present now that we know that both Russia and China are ahead of the U.S. on this technology, and even North Korea claims to be experimenting in that space. This group is also doing very well through the early days of the year.
The last basket is entertainment, which is really just Walt Disney (DIS) , my pick of the year, and ViacomCBS (VIAC) right now. Disney is the ultimate pandemic recovery play, and in my opinion ViacomCBS remains a possible acquisition target for larger media companies. Don't get carried away. There is no chatter. That's just speculation because I think it makes sense for a couple of players without mentioning those players.
So, as far as forming baskets of focus, I am a very solid three for four as the market has melted around us. I do feel that even if the semis are revalued that what they provide is indispensable and I will adapt. Remember my 8% rule. Never take a loss of more than 8% ever. Sub $20 stocks are exempt. On anything unless it happens while I sleep.
Now, I am not limited to names residing outside of those baskets. I want to maintain exposure to energy and to software, especially cybersecurity. I want exposure to Space, not Twitter Spaces, but the final frontier. These areas are too volatile at times like this to be core positions. I trade these. On Wednesday, I added to long-time Sarge faves Zscaler (ZS) , Palo Alto Networks (PANW) , and ServiceNow (NOW) . I had recently been out of all of these names. I sold Salesforce (CRM) on Wednesday morning and bought back later for more than $7 cheaper.
I know I need some cybersecurity on my book. For now, I am keeping these positions small, one quarter of what I consider to be a full allocation or less. Be flexible. Be emotionless. Same goes for energy. Currently I am in Chevron (CVX) , ConocoPhillips (COP) and Apache (APA) . Why? Because energy is hot. Because I expect Permian producers to break ranks and discipline at some point. That said, I am married to none of them.
In short, I think my best advice would be to know what you are trying to accomplish. Know where you are willing to plant your flag and why. Know what names you use to round out your portfolio as a means to an end... to navigate the present. Stay strong my friends, and don't be afraid to stay skinny, while you work.
(NVDA, AMD, MRVL, and DIS are a holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)