Smart money finds opportunities even in bear markets
We’ll start with a scan of the S&P 500 (SPX) index. Below are the results for the top 40 stocks based on year-to-date performance.
The oil and gas sector dominates the performance: 17 of the top 20 stocks come from this sector which has made significant profits this year. But energy-related stocks could soon form a top and the risks of a reversal have increased after a prolonged run. The risks of even a massive reversal will increase significantly if there are signs of a recession after the recent interest rate hikes. The risks will be greater if the economy suffers a hard landing.
Smart money has gradually increased its allocation to sectors that can outperform even in severe recessionary conditions. The action is already reflected in the table above. After removing oil and gas stocks, here is the new list of the top 40 stocks.
There are several stocks in food processing, managed healthcare, and aerospace and defense, which are three sectors that have historically performed well during recessions on a relative basis. I have selected two stocks from each of these sectors below.
Below are charts and fundamentals for three stocks, one from each sector.
Lamb Weston Holdings Inc. (LW)
Since the beginning of the year, the title is up nearly 34%. Beta (the measure of a stock’s volatility relative to the S&P 500) is 0.5. The annual results (year ending 05/2022, published on July 27, 2022) exceeded consensus by 6.6%. The P/E ratio (TTM, GAAP) is 29.27x and the dividend yield is 1.17%. Note that institutions own nearly 89% of the 143.8 million shares outstanding (in the case of AAPL, for example, institutional ownership is 57.6%). The stock is down 9.3% from its all-time highs. The historic highs of February 2020 could be challenged in the coming weeks.
Cigna Corp. (THIS)
Since the beginning of the year, the title is up 30.3%. Beta (the measure of a stock’s volatility relative to the S&P 500) is 0.7. The next earnings announcement will be on November 3, 2022. The P/E ratio (TTM, GAAP) is 16.77x and the dividend yield is 1.52%. Institutional ownership is 90.9%. The stock hit new all-time highs on Thursday of last week (October 13, 2022).
Huntington Ingalls Industries Inc (HII)
Since the beginning of the year, the title is up 21.6%. Beta (the measure of a stock’s volatility relative to the S&P 500) is 0.6. The next earnings announcement will be on November 3, 2022. The P/E ratio (TTM, GAAP) is 16.11x and the dividend yield is 2.11%. Institutional ownership is 87.3%. The stock is down 14.6% from its all-time high in January 2020.
Even in the event of a recession next year, as some economists and fund managers predict, there will be sectors that will outperform and stocks that will offer strong returns. Historically, the three sectors mentioned, Agribusiness, Managed HealthCare and Aerospace & Defense, have provided opportunities for stock pickers in a recessionary environment, among others. Stock picking is not easy, especially in a crowded market with strong competition, and the specific risk, related to a company or a sector, is always high. It is impossible to predict turning points, but significant gains can be made with even a fraction of the movement of selected stocks compared to passive investing which suffers from steep declines and long recovery periods. All of these require solid research and a solid process, as well as a focus on risk management and money to diversify specific security risks.