Whether or not one believes the market is overbought or oversold in the present, what remains inevitably true is that investors are beginning to feel a little more uncertain. A look at the chart below shows that the CBOE Volatility Index has begun to erratically jump. The increase in volatility as well as the start of a downtrend for market benchmarks, such as the Dow Jones Industrial Average, suggests that a correction is now underway.
Yet even as the stock market reaches new highs, it remains dubious as to the ultimate direction looking out a few months from now. On the one hand, the economy remains in a slow recovery as it emerges from the Great Recession stimulated by a global increase in money supply. On the other, it consistently remains shaken by the economic and geopolitical earthquakes ranging from Chinese manufacturing to European sentiment. With corporate profits suggesting market valuations have now become a bit more in tune with the operational realities, it remains a coin toss as to the direction the market will eventually choose.
Regardless of these outcomes, it remains the responsibility of investors to adequately arm themselves with investments that can help them outperform in any market. The following five holdings represent my ideal selections for an uncertain market such as this. For these conditions, it remains ideal to seek market protection through high yields and inflationary hedges. Yet it also remains important to balance this with long-term growth by adding promising innovation or stable growth trends.
- Apple (AAPL). Despite having fallen nearly 45% since its market high, this technology company has begun to look attractive at these levels. The company has been well known for its ability to innovate and market new products as the must-have trend. But more importantly for investors, Apple is still sitting on one of the largest piles of cash ever held by a public company. The company has $137.1 billion, or nearly $146/share in cash. Already offering a 2.5% dividend, one can reasonably expect the company will grow that this year presenting a strong argument for dividend growth going forward. In late August 2012, I made the bold call in my article found here stating that Apple's stock was beginning to get ahead of itself at $675/share. With the heavy discount since, much of that risk has now been taken off. Made safe by its strong balance sheet and high earnings potential, this remains one of the few companies investors should want to be in at these levels, especially in this uncertain market.
- SPDR Gold Shares (GLD). The market may not be seeing much risk when it comes to inflation at the present, but rest assured that the money supply continues to grow at unprecedented levels around the world. After all, central banks continue to stimulate their economies with printed money. With 100% of its holdings in physical gold bullion, GLD remains the simplest way to hold gold and counter the risk of inflated currencies. GLD also provides investors with a stable long-term trend that seemingly operates outside of the stock market itself as seen in the chart below. The latest offset of gold prices has provided investors with an excellent point of entry at these levels.
- iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM). The pursuit of yield remains one of the sole reasons REM appears to look attractive in this portfolio. With a current annual yield of 11.15%, REM allows investors to retain a stable flow of investment income should the market turn sour for a prolonged period of time. REM is an ETF made primarily of mortgage REITs. Pursuing an ETF allows for investors to retain the safe diversification of multiple holdings in a high-yield fund. An environment of low interest rates and a growing housing market provides additional rationale for wanting to be in this ETF. Those uncertain of the fund's ability to retain a high yield during a market crash need only to refer to the chart below in order to be reassured.
- AGCO Corporation (AGCO). With a large amount of money invested into agricultural lands, farming equipment remains in steadily high demand in order to increase productivity. With a price-to-book ratio of only 1.36 and a forward price-to-earnings ratio of 8.47, AGCO remains well positioned to capitalize on this trend. Most recently, Tractors and Farm Equipment Limited [TAFE] and TAFE Motors and Tractors Limited [TMTL] have been heavy buyers of AGCO stock, as reported by AGCO Director Srinivasan Mallika. Over the last month, insider transactions show that TAFE and TMTL purchased $1.07 billion worth of common stock. The ongoing share purchases along with the steadily long-term trend remains a convincing reason to consider AGCO in this uncertain time.
- Solazyme (SZYM). Capitalizing on a long-term growth trend remains the most assured method of excelling on the stock market over multiple years. Although investors may be quick to dismiss this small $480 million company, especially as it has fallen over 55% since its IPO in 2011, they would be neglecting what's really in store for this rapidly growing development company. Solazyme has unlocked the world's first capability to design renewable oils using genetically engineered algae, and viably produce them on a large commercial scale. By pursuing tailored oils, the company anticipates producing large quantities of oils worth $200-$600 per barrel, prices far above what investors normally associate with mere crude oil. As such, the company has partnered with some of the most reputable companies in a variety of industries varying from Food and Agriculture, to Oil and Gas, to Personal Care, to Chemicals, and even to Cosmetics. With construction now underway for its large production facilities, the company remains undervalued in light of its expected growth. Despite $44 million in revenues for 2012, analysts expect revenues to grow north of $282 million by 2014. Now trading at $7.78, Morgan Stanley reaffirmed their overweight rating today with a price target of $15/share.
Altogether, this simple portfolio attempts to both hedge against a possible market downturn without forsaking the long-term growth found in an ongoing recovery. Apple provides a cash-rich investment now fairly priced and likely to raise its dividend in the years to come. GLD provides an ideal counterweight against a falling market and a stable long-term growth trend. REM provides a high yield for ongoing investment income and takes advantage of the artificially low interest rates. AGCO capitalizes upon a steady growing sector of the economy and remains backed by heavy insider buying. Last of all, Solazyme provides a unique opportunity capitalizing upon multiple growth trends varying from sustainability, rising energy costs, whole foods, falling input feedstocks, and green awareness.