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Market declines can be scary. Or, at the very least, unpleasant. After all, it’s emotionally painful to see your existing holdings go down during a selloff. Yet it’s also a fantastic time to add new positions to your portfolio at better prices.
The trick to managing a selloff is preparation. By knowing what to buy and having a general idea of the price you want, you can “top off” your portfolio with best-of-industry companies and ultimately profit from short-term market panics. In today’s market environment, there are a few standout opportunities in three sectors that I’m specifically eying with the expectation of buying at lower prices in the next few months.
Although it’s highly cyclical and still treated by the market with tremendous skepticism at the moment, any further pullback in the energy space looks like a great opportunity. It’s not like people are going to stop using electricity or oil. We’re still going to use cars, and we’re still going to need to charge all of our gadgets.
Admittedly, oil’s performance over the past few months has been mixed at best. Texas tea has traded in a $40 to $50 range, but with several large drawdowns in inventory in recent weeks, it looks like the worst of the selloff occurred at the start of the year. So if oil prices have a big down day or if the market as a whole corrects, buying shares of best-of-breed companies in the sector should pay off handsomely.
I’m a fan of the big names like ExxonMobil (XOM) and ConocoPhillips (COP) on a selloff. They’ve got long track records and have had to deal with numerous booms and busts, coming back stronger each time. I don’t think this energy bust will be an exception.
In general, owning companies in the insurance sector is also a fantastic path to building long-term wealth. While the industry is heavily regulated at the state and federal level, it doesn’t have the high capital costs of a utility company. And since it collects insurance premiums before it has to pay them out, they have a unique advantage in the investment world: float.
Simply put, float is other people’s money. It’s technically supposed to be used to pay out on policies, but since a car or home insurance policy might need to be paid out years down the line (if ever), that capital can be invested in the meantime. If a company can make a decent return and only issue policies in lower-risk customers, it’s hit the best of both worlds.
Admittedly, the secret to this is out. Insurance companies have done well year to date. But in a market selloff, they’ll likely give back a big chunk of their gains. One company in the space that’s still inexpensive is Metlife (MET), although they’re heavier on life insurance where there’s an eventual payout as opposed to property and casualty insurance where there isn’t.
With U.S. stocks still in favor, I’m starting to like some of the insurance companies in international markets that have been beaten down in recent years. One standout name there China Life Insurance (LFC), which is down more than 50 percent from its high. Just don’t forget the old saying: “When the U.S. sneezes, the world catches a cold.” If there’s a big enough selloff in the U.S., other markets will follow suit. So look for an opportunity to buy internationally then as well.
Finally, for the income oriented, consider preferred shares on a market selloff. In terms of risk, they’re far better than stocks, because preferred shareholders get paid first in the event of bankruptcy. Many of the big banks that cut their dividends to a penny or eliminated them entirely during the financial crisis continued paying big yields on their preferred shares. While they might not have the unlimited upside potential of stocks, they’re much better for the risk-oriented investor looking for income.
When buying preferred shares, two factors are critical. The first is the par value. For many preferred shares, the par value is usually $25. So if you can find a preferred issuance trading in the $20 range, you can get a much higher yield and some upside potential as time goes on. After all, like a bond, the preferred share has to eventually be redeemed by the issuing firm at par value.
Many preferred issuances are in the big bank companies. There’s still some lingering fear out there nearly a decade after the financial crisis emerged, meaning there are still plenty of values in individual securities there.
Of course, rather than weed through the preferred world, you could also simply pick up the iShares Preferred Stock ETF (PFF). It holds a basket of these securities and yields 5.61 percent. That’s a far better return than most bonds except the riskiest of corporate junk bonds at today’s yields. When stocks sold off at the start of the year on fears of higher interest rates, you could have bought when the yield was north of 6 percent. Since this is an income play, wait for a similar entry yield before buying.
Remember, when there’s a big market pullback, the babies get thrown out with the bathwater. Quality companies fall out of favor as well during those brief periods where folks are clamoring for cash. For the long haul, buying industry leaders in energy and insurance, as well as preferred shares of companies trading below their par value, should provide excellent returns, provided they’re bought at great prices.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report.