The U.S. Treasurywill run out ofmoney sometime in mid-October,
and Congress won't return from its August vacation until Sept. 9.
In addition to thedebt ceiling, lawmakers still haven't passed a
budget, and a government shutdown could derail theeconomy .
If you've just had a touch of deja vu, it's not because you
are trapped in a Hitchcock thriller. It's because we've been here
before -- and the consequences of political theater are coming
back to haunt the markets.
Going into the last quarter of 2012, the buildup to the debt
ceiling and "fiscal cliff"expiration in January sent the markets
reeling. Between Sept. 14 and Nov. 15 lastyear , the S&P
500index plunged 7.7% on partisanship and panic.
This Time May Be Different
The drama over the last fiscal cliff eventually ended, and toward
the end of the year, I argued for investors to get back in
themarket on signs that the economy would do just fine and that
the so-called cliff was more a molehill.Stocks are now up 16.5%
since late last year.
Before you jump back into the markets, you should be aware
that the game may have changed this time around.
Now the markets are looking at slowing corporateearnings
growth and a government that will probably do more harm than good
in the coming months. Excluding financials, earnings actually
declined 3.1% for companies in the S&P 500 in this year's
second quarter. Financials did well in the quarter largely on
lowerloan loss reserves , artificially and unsustainably propping
up their performance.
As for the government, the House of Representatives has tried
40 times to overturn theAffordable Care Act but has yet to work
on a bipartisan budget proposal. Now parties are positioning
their chips for political Armageddon over upcoming fiscal
We've gone frominvesting despite the government to building a
portfolio that can withstand the 535 Stooges in Congress.
At the height of the fiscal cliff scare, there were few places
investors could hide. Every single sector saw losses. The
Technology Select SectorSPDR (
dropped more than 12.5%, and even the
Health Care Select Sector SPDR (
booked losses of 2.6% over the period.
But a small group of stocks was able to postgains because of
strong business models and government-proof earnings. Two of
those stocks may be your best bet this time around.
Between Sept. 14 and Nov. 15 last year, as investors rushed to
companies with solid, government-proofrevenue ,
Family Dollar (
gained 2.6%, and
Family Dollar's more than 7,400 stores in 45 states focus on
core categories like home products andconsumer staples at
discount prices. Its revenue is not as cyclical as other
retailers and may actually increase with people buying at the
less-expensive chain during periods of economic uncertainty.Sales
have increased every year over the past decade, even through the
financial crisis, and have maintained a 7.8% average annual
growth rate. Theshares have abeta of just 0.4 which means they
have been less than half as volatile as the general market.
Shares of FDO plummeted in January on a first-quarter report
that missed earnings expectations by almost 8%, but thestock has
rebounded as management missteps have been corrected. Even with
the sell-off, the shares have matched the market's performance
since mid-September and should do relatively well amid any
government-inspired market weakness. The stock is approaching my
$74price target but is still a good buy as a defensive
Kellogg's May 2012acquisition of Pringles has helped diversify
revenue for Kellogg, which has always beendependent on its cereal
business. The company now earns 23% ofnet sales from its snacks
segment. The company still earns most (63%) of its total sales in
the United States but has started to diversify to Latin America,
Europe and Asia. With its ability to build brands, it wouldn't
surprise me if these smaller markets were to make a strong
contribution in the future.
The company recently announced a management restructuring that
could help streamline decision-making. Kellogg has continued to
outperform and has beaten the S&P 500 by 12% since last
September. The shares have gotten a little pricey at 23.3 times
trailing earnings as investors have bought into the highdividend
yield and strong price performance. Any weakness in the shares
could present an opportunity to add to a position as revenue
growth is fairly stable and the company has extremely strongcash
flow . The price still has a way to go before my $68 price target
and will churn out a 2.9%dividend in the meantime.
Risks to Consider:
Despite their resilience against a government-induced
sell-off in stocks, these two picks still present
company-specific risks that should be diversified with a
portfolio of other names. Look for other names with non-cyclical
and government-resistantrevenues to weather the upcoming
Action to Take -->
You may not be able to completely avoid the losses associated
with the market volatility around the coming debt ceiling or
fiscal cliffnegotiations , but these two stocks are a good start
to a defensive position with some great potentialupside .
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