With the recent volatility, some investors will take extra precautions in anticipation of a possible bear market. In any type of market, hedging makes sense. When increased uncertainty and headline risk - perpetuated largely by the 24-hour news cycle and analysts' whims - take hold, the need to hedge comes to the forefront.
If you intend to safeguard your portfolio with stocks, you'll generally want to find equities that provide the type of stability that can help you weather the storm. At the same time, you don't want to miss a great growth story, particularly if you enjoy a relatively long time horizon prior to needing your money. Stable stocks that pay a dividend and companies you think could perform well despite a downturn make the best stock picks for mitigating a choppy or flat-out sloppy market.
A Utility Play
Wisconsin Energy (WEC). I remember this stock from my childhood. It's one of the first I owned through a Dividend Reinvestment Plan (DRIP). I am still not sure why I bought it, considering my 80- or so-year time horizon to retirement. Nevertheless, it has all the makings of a safe stock, plus it's a well-managed company you can feel good about owning. Investors often flock to utilities for safety. And WEC represents the cream of the crop.
Not only does WEC pay a dividend of $1.04 per share for a 3.5 percent yield, according to Yahoo! Finance, but it outperformed the S&P 500 (SPY) over the past five years. A $10,000 investment in WEC five years ago would have netted you $16,732 today, before taxes. Assuming you reinvested dividends, it's good for a 10.85 percent return versus $10,767 and a 1.49 percent return on the same investment in SPY.
Procter & Gamble (PG). No matter how bad things get, people need to buy certain necessities. Investing in the companies that bring these products to market can often shore up your portfolio during lean times. It's easy to forget the household names behind Procter & Gamble. They run the gamut from Charmin to Bounty to Pampers to Duracell to Tide and many more.
PG also pays a dividend, good for $1.93 per share and a 3.1 percent yield. Like WEC, PG bested SPY over the last five years, posting an impressive 16.26 percent return with dividends reinvested before taxes, turning $10,000 into $11,626.
Amazon.com (AMZN). The more I look at Amazon, the more I consider it Wal-Mart (WMT) and Costco (COST) all rolled into one. And, even if only on the periphery, Amazon represents a pseudo-consumer staples play. Last year, for the first time ever, media items such as books and DVDs comprised less than half of Amazon's revenue. This infers Amazon is selling other items, including consumer staples. Support for this thesis exists when you consider the success of loyalty features such as Amazon Prime and Subscribe and Save. I would bet that consumers will increasingly turn to Amazon in any market, including a bear one, for the things they need (and don't need) at competitive prices.
I suggest playing Amazon a bit differently, however, given its lack of a dividend and relatively high valuation. You can earn income and possibly open a position in AMZN common stock by selling put options. Pick a price you would be willing to enter Amazon at and write a put at that strike price. For example, if you would be comfortable owning AMZN at $150, you could sell the AMZN April $150 put for a premium of $2.54, as of Wednesday's close. If AMZN does not drop below the put buyer's breakeven price of $147.46 by the April options expiration date, the put expires worthless and you generated $254 worth of income for every put you sold.
You could repeat this process with frequency. If the stock hits or falls below the breakeven price, you run the risk of being put 100 shares of AMZN for every contract sold at $150 each. If you had the foresight, by the way, to invest $10,000 in AMZN five years ago, you would have $44,903 today, good for a 349 percent return. Though anything's possible, don't expect such amazing appreciation over the next five years.
First Solar (FSLR). You can trace many of the market's fits and starts to uncertainty regarding energy. America's dependence on foreign oil and fears over the safety of nuclear energy present key concerns going forward. Whether solar ever becomes a primary source of energy is neither here nor there; it will likely have a significant, and growing, place domestically and internationally. One of the U.S.-based companies in that space, First Solar, could thrive even during a bear market, particularly one driven by escalating energy prices.
While FSLR's share price might shock some -- it closed at $155.08 on Wednesday -- its forward P/E ratio stands at 14 and analysts expect impressive earnings growth in the near- to mid-term. Had you gotten in on the ground floor with FSLR back in November of 2006, a $10,000 investment would have turned into $64,236 today, a whopping return of 542 percent.
Citigroup (C). It almost feels strange to call Citi a speculative play, but it really is. And many investors have room in their portfolios for a speculative play, even during cold market runs. If you believe emerging markets will perform well during a U.S. bear or down market, Citi becomes extra attractive, due to its exposure in Asia, Africa, and the Middle East.
Add to this the likelihood that Citi will begin returning capital to shareholders in 2012, and the upside in the stock given its recent earnings miss, and you have the makings of a value, growth, and income story all in one. Of course, we all know Citi's history over the last five years. Had you let $10,000 sit in C over that time, you would have just $1,069 left to show for it today, a loss of 89 percent.
As always, take my stock selections with a grain of salt. Use them as a starting point for your own due diligence. I reserve the right to be wrong, so if you lose money on one of these stocks, you only have yourself to blame.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.