Is your portfolio prepared to handle the coming market volatility? I am not talking about buying insurance like options or shorting at this time.
The focus of this article is making sure that your long term stock portfolio is designed to weather whatever financial market storm may be right around the corner.
While no one can say for certain what the future holds, certain stocks simply have a better record than other when it comes to performance during difficult times.
Looking at the past to locate these gems then adding these stocks to your long term holdings is a significant step toward building an all-weather stock portfolio.
This article will provide the details on two of our favorite stocks that have proven to be true top performers regardless of overall market conditions.
First, let’s take a look at current stock market conditions.
These are intense times to be a stock market investor! Wild swings and spiking volatility have snapped the bulls out of their complacency and have awaken the bears out of their hibernation.
The market barometer Dow Jones Industrials plunged over 1000 points at the start of the week and the broad based S&P 500 gave back 100 points at the open of trade.
Lessons learned from the 1987 market crash have resulted in trading circuit breakers which stop trading when the S&P 500 drop by 7%, 13%, and 20% from the previous close. These circuit breakers help prevent a complete market melt-down like we experienced in 1987 from ever happening again.
Stocks are being pressured by a trifecta of bearish pressures. Chinese economic fears, rate hike worries, and just plain old profit taking have struck stocks in a full frontal attack.
In fact, just this week, things became so dire that the New York Stock Exchange invoked Rule 48. Rule 48 doesn’t stop trading, like the circuit breakers, but rather speeds up the opening by appending the regulation that stock prices need to be announced at the market open. Rule 48 allows prices to open without approval of stock market floor managers which prevents delays in opening that will likely result in even more panic selling. This rule has only been used a few times since it was approved by the SEC in 2007 and this Monday was one of those times.
All professional traders understand that the time to buy is when there is figurative blood in the streets. This fact was witnessed on Monday as the stock market came roaring back 100’s of DJIA points after the steep sell off. While this is certainly great to see, there is no guarantee that the bears will not continue to wreak their carnage on the stock market.
What’s the best move for long term stock investors?
Steep sell offs have historically proven to be ideal buying opportunities for nimble and savvy traders. Investors should use these often fleeting opportunities to buy stocks at a discount. Make no mistake about it, it isn’t easy to step into the fray to buy during periods of sharp selling. However, it is how fortunes have been made over time in the financial markets.
In addition to buying after steep sell offs, making certain that your portfolio core is built on stocks that have proven to survive and even thrive in all economic climates is paramount to long term investing success.
Pulling from at the universe of stocks, we have narrowed down our two favorite companies for weathering any financial storm.
Our number one favorite stock proven to survive and thrive during economic downturns is Dorman Products (Nasdaq:DORM).
Dorman Products is a leading supplier of automobile replacement parts. It describes itself as a supplier of replacement parts and fasteners for passenger cars, light trucks, and heavy duty trucks in the automotive aftermarket. For those of you not familiar, the term “aftermarket” means parts not made by the auto manufacturer themselves.
The Company distributes and markets approximately 140,000 different stock keeping units (SKU’s) of automotive replacement parts and fasteners.
Approximately 85% of the Company’s products are sold under brands that it owns and the remainders of its products are sold for resale under customers’ private labels, other brands or in bulk.
In addition, Dorman generates revenues from the sale of parts that it packages for sale in bulk or under the private labels of parts manufacturers and national warehouse distributors.
The Company divides its products into four classes: power-train, automotive body, chassis and hardware.
Its sub-brands include DORMAN OE Solutions, DORMAN HELP!, DORMAN TECHoice, DORMAN AutoGrade, DORMAN Conduct-Tite!, DORMAN FirstStop and DORMAN HD Solutions.
The company is known as being counter-cyclical. This means that it thrives during tough economic times.
You see, when times get tough, consumers pull back from buying new cars or trucks opting to repair what they have. This money saving move by consumers is what super charges the share price of companies like Dorman.
Interestingly, sales at Dorman have been steadily increasing since 2007 with no slowdown whatsoever during the recessionary periods. In addition, it’s critical to note, that the average age of cars on the road is an amazing 11.5 years. The Institute for Highway safety predicts that this number will likely stay constant over the next several years. This means that Dorman’s sales are likely to continue growing as older car owners will be forced to purchase parts and equipment to keep their vehicles on the road.
Our next favorite company for tough times is the ubiquitous retailer Wal-Mart (NYSE:NYSE).
Despite its shares trading lower, Wal-Mart has continued to lift sales since 2007. Even the recessionary periods of 2008-2009 saw sales growth.
The reason for this success regardless of the economic climate is the fact that Wal-Mart sells nearly every necessity needed by a wide range of consumers.
In addition, its low prices keep consumers coming back to buy what they regardless of economic conditions.
Wal-Mart’s international total revenue has increased 300% over the last 10 years. In addition, the company generates 14.5% internal rate of return on new store launches crushing its current 7% cost of capital.
With these numbers in mind, the retailer is in the process of ramping up investments into its brick and mortar and e-commerce operations. It plans to invest up to $13 billion in store renovations, e-commerce, and technology.
In addition, Wal-Mart is leasing space to outside vendors like Subway and hair salons.
CEO Charles Holley Jr. states, “History says the Supercenter is still relevant to the customer. We are working to ensure that it stays relevant five, ten, 15 years from now.”
Right now is an ideal time to purchase shares in Wal-Mart. Not only are the shares trading at steep relative discount, the economic climate makes it a perfect core holding to weather any pending economic storm.
The Key Takeaway:
Volatility is increasing the stock market. Just this week, the DJIA experienced its largest one day swing of all time.
Investors can take advantage of the selling by purchasing stocks at a discount. It is also very wise to make certain that your long term portfolio consists of stocks that have been proven to weather and even thrive in difficult economic times.
We have identified two stocks that are time proven to thrive during even the toughest times. These stocks are the counter-cyclical auto part maker Dorman Products and the giant retailer Wal-Mart. Both would make ideal additions to your long term stock market portfolio.