As themarket rises steadily higher, it's getting harder to find
true bargains. And though a wide range of good stocks still have
reasonably-pricedshares , any
market
pullback would send most stocks lower from their 52-week highs.
This backdrop has led me to start raising cash in my
$100,000 Real-Money Portfolio
. One of my top rules of investing is to always have funds
available if you think the market may soon present fresh
opportunities.
Even as I see a moderate pullback coming, I may be wrong. The
market may indeed march ever-higher. And that's OK. I still have
85% of my funds invested (albeit with one position representing a
markethedge ). So I'm likely to benefit from any upward move in the
market as well, just not to the extent that a fully-invested
risk-focused portfolio may benefit.
As I stated at the launch of my
$100,000 Real-Money Portfolio
, I seek to preserve capital while in the process of building it.
This approach is bound to modestlyunderperform in a ragingbull
market , but it should also fare better in a flat to down market.
Indeed, with all of my picks, I focus on "downside protection."
Every pick was made in the context thatshares were likely near a
floor in case my investment thesis didn't pan out or the market
turned south.
Of course several of my picks no longer have such downside
protection in place. For example,
Cree (Nasdaq:
CREE
)
and
Ligand Pharmaceuticals (Nasdaq:
LGND
)
have moved up nicely since the year began and can no longer be seen
as having much downside support. That said, both of these companies
have such robust long-term growth prospects, that I simply have to
shoulder the risk.
What to buy now?
Despite my concerns about a possibly over-extended market, we're
about to face a fresh buying opportunity. In coming weeks, I'll be
focusing on "earnings season casualties." These are companies that
deliver tepid quarterly results or proffer weak forward guidance.
Investors often overshoot the mark in their zeal to unload these
kinds of stocks, and they can end up as fresh, solid long-term
value plays. The problem with these stocks is that it may take a
quarter or two for their value to be appreciated by investors.
That's why I'm unlikely to ever put more than $5,000 in any initial
position.
I currently have about $13,000 in available cash. Frankly, if the
market keeps trending higher by the timeearnings season begins
around April 10, I may sell some more stock to give me even more
cash with which to work.
What to expect thisearnings season ?
I've separated my holdings into two camps in my portfolio: those
stocks that will largely be unaffected by
earnings season
, and those that could make strong moves.
In the first camp, you have steady-as-she-goes stocks like
Hasbro (NYSE:
HAS
),
Ford (NYSE:
F
)
,
Alcoa (NYSE:
AA
)
and
Citigroup (NYSE:
C
)
. We have a pretty clear read on industry conditions for each of
these firms, so anearnings shocker is quite unlikely. (I'll be
looking at bank stocks and the coming quarter later this week, and
suspect that Citigroup's reboundingcapital markets division should
lead to moderate quarterly upside for the banking giant.)
On the other side of the coin, I hold stocks that could quickly
move higher or lower in coming weeks. For example,
shares
of Cree have risen more than 30% since the year began, even though
the first quarter is likely to be either in-line or below consensus
forecasts. The LED-lighting industry dynamics are clearly
improving, but you won't see that until the June quarter or beyond.
Still, I am sitting tight on this high-growth stock.
Ligand Pharmaceuticals is another vulnerable holding. This biotech
firm is gaining a following onWall Street , pushing its shares up
to two-year highs. I expect this stock to be much higher over the
long haul, but if it makes a dash into the $20s in coming weeks,
then I'd be inclined to sell off half my position. Then again, a
weaker market could push this stock back down, in which case I'd be
sitting tight.
Action to Take -->
Before earnings season gets underway, I'll be providing a much more
in-depth preview for several of my holdings. Stay tuned, because
knowing what to expect may help you to move quickly as the
quarterly numbers are formally released. [And by that token, if you
haven't already signed up to receive my
$100,000 Portfolio
updates in your email inbox, you can do so by
clicking here
. It's completely free for a limited time.]
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CREE, HAS, AA, C, LGND, F in one or more if its "real
money" portfolios.