QE-Proof Stocks for Summer 2011

by: Eric Parnell, CFA

"To be interested in the changing seasons is a happier state of mind than to be hopelessly in love with spring." - George Santayana

In my recent article entitled What to Expect from QE2's Pending Conclusion, I took a look at the risks facing the stock market if the Fed decides to follow through and end QE2 at the end of June. Whether the Fed will actually follow through with this commitment will remain a subject for debate in the next few months. But holding the Fed to its recent word, the time is now to look ahead and try to determine which investments might hold up best once QE2 is over.

When the Fed ended QE1 in Spring 2010, the stock market immediately dropped -17% in a matter of weeks. Seeking to avoid this type of downside volatility post QE2 in the second half of 2011, I went searching for those stocks that performed well through the last "QE Pause" during Summer 2010.

My search criteria was the following. First, I focused my search on quality stocks - if QE2 is going to end with a global economy still on shaky footing, I would like to hold the companies that are set up to weather any pending storm. I used the S&P 500 High Quality Rankings Index to provide me with my candidate stock list. Next, I focused my analysis on the period from April 26, 2010, when stocks peaked at the end of QE1 to August 27, 2010, when Fed Chairman Ben Bernanke confirmed that QE2 was on its way in his Jackson Hole speech and the stock rally started anew. Finally, I screened the universe for stocks that experienced only short and limited declines during this stretch (-11% or less) and maintained upward price momentum throughout this time period. Out of the 125 in the universe, I was left with a list of 19 stocks, which I've listed below:

Ecolab (NYSE:ECL)
McDonald's (NYSE:MCD)
Brown & Forman (NYSE:BF.B)
Altria (NYSE:MO)
PepsiCo (NYSE:PEP)
Kraft (KFT)
Campbell Soup (NYSE:CPB)
Hormel Foods (NYSE:HRL)
McCormick (NYSE:MKC)
Procter & Gamble (NYSE:PG)
Colgate-Palmolive (NYSE:CL) (Borderline for inclusion on this list)
Kimberly-Clark (NYSE:KMB)
Clorox (NYSE:CLX)
Chubb (NYSE:CB)
NextEra Energy (NYSE:NEE) - Formerly FPL Group
Wisconsin Energy (NYSE:WEC)
Southern Company (NYSE:SO)

Inclusion on this list does not mean that they all currently represent fundamentally attractive investment opportunities. Nor does it mean that they haven't been subject to some lumps at other times outside of the QE pause of last summer. And certainly other stocks outside of the quality universe used here also held up well during this time period (a point I will revisit in a future post). But what this list does provide is a reasonable group of companies to watch for potential inclusion in a portfolio in anticipation of the potential end (or perhaps pause) to QE2 coming in the near-term forecast.

Next time, I'll be taking a look outside of stocks into other asset classes to see what else might hold up well post QE2.

(This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.)

Disclosure: I am long CL, CLX, KMB.

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