Buy this, not that … and why

Good morning!

The US markets are closed today in observance of Dr. Martin Luther King Jr. Day so there’s no specific market action to speak of in the early going. But there IS a lot to think about.

Here’s my playbook.

The markets are trying to re-assess what stocks are really worth in the face of at least 4 rate hikes this year. I think the number may be 5 or more but that’s just me.

High-flying stocks are viewed as suspect because rates factor into the discounted cash flow models Wall Street uses to assess price. Apple trades at 30X while Gilead trades at just 12.25X, for example.

What happens when rates go up is that the models get reconstructed to reflect discounted rates that, in turn, drive valuation. At the same time, leveraged traders sell hard and fast to avoid getting caught offsides as the cost of the margin they’re using to juice returns rise.

Not surprisingly, highflyers get nuked as multiples (used to make DCF calcs) get recalculated. That’s why you’ve seen volatility jump markedly in recent weeks and tech come under pressure.

You often hear me say that recent highs don’t count when this stuff happens. There really isn’t anything complicated about why not.

Prices go right out the window in the face of rising rates which is why multiples used in low-rate environments no longer apply.

That’s why I started adding lower multiple stocks like Chevron (CVX), for example, to the One Bar Ahead™ Model Portfolio last year and will continue to favour them as Wall Street continues to adjust. (You can learn more here)

It’s also why I laid out my rationale the way I did a few moments ago with the fabulous Stuart Varney on the Fox Business Network. (Watch)

What you want right now is very simple:

a) The best companies but particularly those making products and services the world cannot live without; and,

b) Companies with amazing earnings and cash flow because that suggests they can manage inflationary pressures better than alternative choices that are driven by sale/growth at all costs.

Everything else is a risk you don’t need.

Bottom Line

Do not let short-term greed derail your plans for long-term wealth. Ignore the noise. Think about the future. Invest accordingly.

You got this – I promise!

Make it a GREAT day.


Keith