The doomsayers live for big down days in the market. So do those whose glasses are half-empty.
What's more, the uber-rich investors employ strategies far beyond our ken. The Average Joe investor may not have the access to alternative investments that enable them to succeed during corrective phases or bear markets like the ultra-wealthy, but one can still persevere during this period. It just requires some changes in your investing approach.
Step 1: Reduce Your Risk
Many small stock growth investors may not be accustomed to using options in their long positions since the availability of options in small-cap and microcap stocks is slim to none. If you wish to keep certain long positions or engage in new ones that you believe will withstand the current onslaught, you should consider selling short-term, slightly out-of-the-money calls and pocket the premium associated with the transaction. In situations where you are not married to a stock, or already have meaningful built-in returns, sell a short-term in-the-money call. The premium will be higher and if it gets called away, so be it. Rest assured it is probably an unlikely event anyway.
Step 2: Engage a New Approach
Most readers of The Stock Junction are pure, growth-seeking investors. When growth stocks are under assault, and the smallest stocks are also vulnerable, it requires a whole new approach to the market. I have recently preached about putting your money in small stocks uncorrelated to the market, and that remains a solid option. Still, that is not enough. We are seeing a rotation into value stocks whose capital appreciation potential is based upon higher incomes generated by asset growth rather than traditional means. That means you should buy stocks with strong balance sheets, high book values, etc. rather than revenue and income growth drivers.
Step 3: Remember That Cash is King
Do not fear sitting on a fair amount of cash. During a corrective phase there is no necessity to be fully invested. On the contrary, it is prudent to hold 10% to 30% of your total investment dollars in cash for the short term.
Step 4: Do Not Look at Valuations
In times like these, the conventional wisdom is to look at the present price/earnings multiple valuations on the stock market, sectors and individual stocks to find an undervalued situation. However, this strategy is a recipe for disaster. Since the market does not yet have a floor, and specific sectors like biotech are under attack, no one really knows what is undervalued or overvalued in the near term. Once the dust settles, this metric should be employed, but not before.
Step 5: Do Not Panic
The most important thing to do is not panic. Ignore the talk of 30% drops and big crashes. If you fear losing sleep over it, go to a larger cash position. Regardless, you should take comfort that this too shall pass at some point, and a return to normalcy is in the offing.
Shaky market environments tend to prompt one of three reactions in the investing public: Individual investors sell holdings, buy on weakness or are too paralyzed by fear to do anything. Since they are managing their own money, the choices they make are their own and they only answer to themselves.
What if they had to answer to other investors such as limited partners in a hedge fund? What would they do? If I were a hedge fund manager today who was not going to change my existing short positions but modify my long strategy, here is exactly what I would do.
One of the problems that plagues individual investors when they perform their own research and due diligence is that they don’t know how to properly value non-revenue producing stocks like biotechs. With so many potential valuation methodologies, it is understandable that one might get confused. With that in mind, here are some hard and fast rules to use as part of your biotech stock-picking process.
Nearly all small and emerging biotech companies are not yet producing revenue. That makes it very hard to place a value on them. In nearly all cases, these stocks trade based upon the potential impact of milestones or events and also trade on such news. Before determining the upcoming milestone on which the stock is hinging its future, investors should find out the company’s cash position and calculate its quarterly burn rate, or amount of money it loses per quarter to ensure it has the ability to stick around. After all, without cash, how can it survive?
The recent stock market performance is enough to drive one to drink. Instead of heading to the liquor cabinet, I reviewed some of our 2013 profiled stocks to see if there was a gem to be found that is uncorrelated to the market. Lo and behold, Castle Brands, Inc. (NYSE – ROX - $1.22), a stock profiled in the fall of 2013, looks better than ever. Not only is the stock up nearly 50% in the past six months, it has remained largely unaffected by the stock market selloff in recent days. With a bullish technical chart and improving fundamentals, I would not be surprised to see another 50% rise in these shares.
For the uninitiated, Castle Brands, Inc. is a developer and international marketer of premium beverage alcohol brands. The key brands include: Gosling's Rum®, Jefferson's®, Jefferson's Presidential Select™ and Jefferson's Reserve® Bourbon, Jefferson's® Rye Whiskey, Boru® Vodka, Celtic Honey® Liqueur, Castello Mio™ Sambuca, and many others. Gosling’s Rum® and Ginger Beer are the main ingredients in Castle Brands’ trademarked Dark N Stormy cocktail, which also includes Ginger Beer over ice with a slice of lime. The popularity of this drink is a big driver of sales for the company.
The stock market is sick and so are most investors’ stock portfolios. The good news is that unlike most market watchers, we are now able to diagnose what has been happening in the market this year and identify how to nurse your portfolios back to health. As is the case with most cures, we must first diagnose the current situation before prescribing a formula designed to rehabilitate the problems. So, let's start at the very beginning: Jan. 1, 2014.
Looking back, nothing thus far in 2014, save for the cannabis stock rally, seemed to make any sense. In almost every start to a new year, the previous year’s big movers begin to sell off early on and are replaced by stocks that perhaps had a bad year before but are well-positioned strategically and appear to be fundamentally attractive. Our stock picks and approach reflected the expectation of this phenomenon. For some reason, the momentum stocks remained in play while the more undervalued stocks stayed under the radar. Plus, the market reached new highs despite our projections that Q1 results would be negatively affected by weather and should be used as a catalyst to sell stocks.