The big drop in stocks yesterday in response to the Fed minutes was perfectly logical, but still slightly ridiculous. Jay Powell and others at the Fed had already made it clear that they were going to reverse policy and start to tighten this year, so selling when that intention came in print rather than in a press conference, testimony, or interview made little sense. Still, it was early confirmation of what I said when I last wrote here, that the focus on tightening policy could make 2022 a tough year for stocks. Even in that overall environment, though, there will be winners and losers and a big drop can be seen as an opportunity to pick up some potential winners at a discount.
When looking for those winners, it is important to keep the big picture in mind. You are looking for companies that can benefit from, or not be hurt too much by, both the inflation that is pushing the Fed to shift tone and the rising rate environment that will result. With that in mind, here are a couple of stocks that got dragged down in the drop yesterday, but for which the base case is still strong.
Apple (AAPL)
Not the most original pick, I will grant you, but I have been adding to my holdings of AAPL on dips for a while and it has served me well. I guess you could argue that the valuations are a bit rich, which would make AAPL seem like the kind of stock that would get hit hard in this kind of selloff, but they are rich for a reason: Apple is perfectly suited to the expected environment in 2022.
They have massive brand loyalty and therefore pricing power, so rising input costs can be passed on to consumers without doing much damage to sales volume. Each time a new, higher priced iteration of the iPhone has been released over the last few years, there are often people saying this time it is too expensive, and won’t sell. So far, the doubters have always been wrong, so it is reasonable to think that prices of existing products can be raised when needed without really hurting sales.
Then there is the fact that Apple has around $62 billion of cash on hand and free cash flow of over $73 billion over the last 12 month period. That cash becomes more of an asset as rates increase in two ways. First, it is possible to get more of a return on it, even if it is held in safe, short-term investments, and second, it reduces the need to borrow at higher rates. Add all that up, nibbling at Apple on drops such as this makes sense.
MetLife (MET)
MET opened higher yesterday morning, then dropped dramatically when the Fed minutes were released, a move which left me scratching my head. I can only assume that it just got caught up in the general downdraft or was sold as a part of indices when the ETFs that track those indices were dumped by traders, because the news that prompted the selling is actually good for MET and other big insurers.
Insurance companies take your premiums and invest them to get a return, but are required to invest primarily in safe, liquid assets so they can meet payout requirements should they come. A rising rate environment therefore means better returns on big chunks of cash that they have to hold, but it doesn’t directly impact their potential liabilities nor the market for their products. That is why MET has performed so strongly over the last year, gaining around 40%. Despite that though, it still has a forward P/E of 8, suggesting long-term value that makes the stock worth accumulating on dips.
Neither of the above are particularly sexy picks, nor do they offer the possibility of quick, triple-digit returns, but that is kind of the point. This year isn't likely to be a great year for stocks, and after over a year and a half of strong gains, that means investors must make a mental adjustment. You are no longer looking for big winners. You are looking for stability and a particular set of circumstances that can benefit from the current environment, and both AAPL and MET fit that bill.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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