Positioning For The Bear

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Includes: AVGO, CTL, EFX, EL, EQT, ETR, EXC, FCX, FE, GAS, MCK, MRO, NEM, PXD, SBUX, SYK, TIF, TSN, VLO, WM
by: Reality Shares

Summary

Now that volatility is the norm rather than the exception, investors can take steps to become better positioned and prepared for the bear market.

Right now is not the time to be optimistic and hopeful for a comeback with the worst performing names in your portfolio.

In every bear market cycle, there will always be quality investments to choose from.

Seek out funds and ETFs that offer an alternative, non-correlated source of return.

By Eric Ervin, Co-Founder and CEO, Reality Shares

Major U.S. averages are falling further and further in 2016 as investors remain concerned about weak economic data out of China and the continuing decline of crude oil prices. Now that volatility is the norm rather than the exception, investors can take steps to become better positioned and prepared for the bear market.

Trim Your Losers

Right now is not the time to be optimistic and hopeful for a comeback with the worst performing names in your portfolio. Only stick with the positions you have the most confidence in for the long haul. Ask yourself, "If my portfolio was 100% in cash right now, how would I invest it?" If it's not something you would buy today, sell it immediately and pare your losses.

Look for Quality

In every bear market cycle, there will always be quality investments to choose from. It's important to check the quality of earnings and to take a closer look at corporate fundamentals. When considering dividend payers, analyze levered free cash flow as a percentage of current dividend payments, study cash positions, and evaluate the longevity of business plans to ensure companies are healthy enough to maintain and even increase their payouts on a consistent basis. Now is not the time to risk capital on business fads . . . it's time to stick with those solid names you can trust through the good times and the bad.

Go Against the Grain

Seek out funds and ETFs that offer an alternative, non-correlated source of return. Specifically, look for funds with long positions in the quality names that also have the ability to short underperforming sectors or companies. Alternative investments can both protect as well as add returns during choppy markets like the one we are facing.

Reality Shares' DIVCON rating system ranks companies based on their future dividend health prospects. The top companies, which we call the DIVCON Leaders, tend to have strong free cash flow, solid balance sheets, and a continued willingness from management and the board to increase dividends in the future. The companies tend to move in tandem with the broader market when times are good, but they exhibit more defensive characteristics when times are difficult. This is evidenced by the 100% upside capture and 80% downside capture exhibited by the DIVCON Leaders Dividend Index over the 15-year period from 2001 through 2015 (on a back-tested basis).

Conversely, the worst scoring companies, which we call the DIVCON Laggards, have historically exhibited weak balance sheets and fundamentals and have tended to underperform on the downside. The DIVCON Dividend Defender Index, which is 75% long the Leaders and 25% short the Laggards, has historically delivered strong risk-adjusted returns over most market cycles (from 2001 through 2015, on a back-tested basis).

The top 10 positions in the DIVCON Leaders Dividend Index are:

1) McKesson Corp. (NYSE:MCK)

2) Broadcom Corp. (NASDAQ:BRCM)

3) Waste Management (NYSE:WM)

4) Estee Lauder Companies (NYSE:EL)

5) Tyson Foods (NYSE:TSN)

6) Starbucks Corp. (NASDAQ:SBUX)

7) Stryker Corp. (NYSE:SYK)

8) Valero Energy (NYSE:VLO)

9) Equifax Inc. (NYSE:EFX)

10) Tiffany & Co. (NYSE:TIF)

The bottom 10 positions in the DIVCON Dividend Defender Index are:

1) FirstEnergy Corp. (NYSE:FE)

2) Newmont Mining (NYSE:NEM)

3) Exelon Corp. (NYSE:EXC)

4) Entergy Corp. (NYSE:ETR)

5) AGL Resources (NYSE:GAS)

6) CenturyLink, Inc. (NYSE:CTL)

7) EQT Corp. (NYSE:EQT)

8) Freeport-McMoRan (NYSE:FCX)

9) Pioneer Natural Resources (NYSE:PXD)

10) Marathon Oil (NYSE:MRO)

More information on the Reality Shares Indexes can be found here.

Business Relationship Disclosure: This article represents the opinion of Eric Ervin and may not represent the view of Reality Shares Eric did not receive compensation for this article, and he has no business relationship with any company whose stock is mentioned in this article.

Disclaimer

This material is presented for general information purposes only, and does not constitute an offer to sell securities.

This publication has been prepared and issued by Reality Shares Advisors, LLC ("Reality Shares"). Reality Shares makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Without limiting any of the foregoing and to the extent permitted by law, in no event shall Reality Shares, nor any affiliate, nor any of their respective officers, directors, partners, or employees, have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents.

This publication does not constitute general or personal investment advice or take into account the individual financial circumstances or investment objectives, or financial conditions of the institutional users who receive it. This does not constitute an offer or solicitation to purchase or sell any securities or funds, nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.

The information herein is not intended to predict actual results, which may differ substantially from those reflected. Investing involves risks, including possible loss of principal. Performance data quoted here represents past performance. Past performance is not necessarily indicative of future results.

Other than disclosures relating to Reality Shares, the information and material contained in this publication has been obtained from sources that Reality Shares believes to be reliable, but Reality Shares does not represent or warrant that it is accurate or complete.

This document contains certain performance data based on back-testing, (i.e.) simulations of performance of a strategy as if it had actually existed during a defined period of time. The results of such data presented here are for illustrative purposes only, and constitute the judgment of Reality Shares. While the information has been prepared in good faith, there are inherent limitations that recipients must consider carefully. Different models or different assumptions may yield different results.

Reality Shares, Inc. keeps certain activities of its business units separate in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of Reality Shares, Inc. may have information that is not available to other business units. Reality Shares, Inc. has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. No representation is being made that any investment product will achieve performance similar to those shown.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.