With the S&P 500 (NYSEARCA:SPY) resting just below market highs that are seemingly becoming harder to extend, it is time to revisit portfolio strategy on both the Macro and Micro levels through the lenses of relative value and either the capital manager's ability or inability to remain nimble.
The current Macro thesis is that this bull market is either in its last phase or middle/reverting phase depending on whether or not we are in a true secular bull market, but this is better determined at lower index prices (assuming the Macro thesis proves correct) in an 8 to 18 month timeframe. Between now and then, some creativity is required to outperform the broad market. As stated in a previous article entitled "The Fed May Have A Way Out Of 'Extraordinary Accommodation': A Brief How-To Guide For Avoiding Claymores," current optimal portfolio strategy points to maintaining a heavy cash position for now, but in the case of Macro assertions being proven wrong, some equity exposure should be maintained. This base case is either validated or slightly discredited by the capital manager's "nimbleness," assets under management, or portfolio size, while taking into account all capital gains tax details.
Now the question becomes where to look for the remaining equity exposure. Under both cases (that we in a secular bull market and prices merely pause here and that prices begin to fall as part of a new bear market), strong dividend paying companies with moderate beta and debt exposure seem ideal. As previously stated, companies that continue to furiously buy back shares for the next 8-18 month timeframe should be considered dangerous because they will likely be over-leveraged when and if the index falls, and furthermore, there is less benefit in buying back shares when the market becomes fully- priced. Instead, companies who build their dividend-- which prudent CFO's should be advocating in a fully-priced bull market-- are ideal because a large dividend when reinvested can help investors weather broad market declines better than simple equity exposure.
Apple (NASDAQ:AAPL) has been a top pick since early 2014 because of their buyback program, product cycle, and newly enlightened management, but the stock has become fairly priced in the short- to medium-term. It would seemingly be best to forcefully raise the dividend of 1.87% from here and build a moat in the case of a broad market decline, but all things considered, Apple should still outperform the broad market though to a lesser degree going forward.
McDonald's (NYSE:MCD) has become attractive in the past month due to the most recent sell-off, a strong dividend of 3.59%, and bearish sentiment stemming from slumping sales. McDonald's early mental engines Ray Kroc and Harry Sonneborn argued that MCD is not in the hamburger business as most analysts are now suggesting, rather it is in the real estate business. As a result, the income corporate McDonald's sees is derived from the buying and selling of prime property (now even throughout the developing world), franchising fees, and rental income from the franchisees. There are multilateral pushes from aligned incentives to reform image, menus, and outcomes that fit different parts of the world from both the macro and micro levels-- that is, from corporation to franchisee.
Verizon (NYSE:VZ) seems to be a pick where macro and micro themes align. Verizon boasts a 4.42% dividend in the middle of a mobile device upgrade cycle and acts like an inflation protected bond with a PE ratio of 10 where the downside is broad equity market exposure.
Finally, an old favorite, Lockheed Martin (NYSE:LMT). Lockheed Martin is arguably one of the best managed companies on the planet with a fiery female CEO, Marillyn Hewson. It firmly supports a 2.93% dividend (being raised to 3.3%) and should see strong tailwinds as geopolitics remain in focus and homeland security becomes a bigger issue in the 2014 midterm elections and quite probably the 2016 Presidential election as well. LMT recently boosted both its buyback program as well as its dividend, but if these assertions are correct, the buyback should be rewarding given Macro mechanics, but will be hurt by a serious broad market decline.
This new targeted Macro/Micro portfolio retains cash heaviness for the capital manager, provides a 3.2% dividend buffer (before LMT increase) when equal weighted (which is the same as the 30-year bond yield), and should still outperform the broad equity market in most scenarios. There is elevated risk in the failure of a mobile device upgrade cycle via exposure to both AAPL and VZ, but the numbers are pointing to a positive outcome here and VZ isn't solely dependent upon just AAPL devices.
Disclosure: The author is long AAPL, MCD, VZ, LMT.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.