Please refer to Important Disclosure Information at the end of this research note.
With the market down almost 10% for the year, it’s natural to ask - should we stay the course with our investments, double down, or just sell everything and go into cash?
Opinions vary, and are usually tied to incentives:
- Wealth management firms who are compensated based on assets under management will likely advise you to “stay the course” or even “double down.”
- Hedge funds with short positions that will profit if the markets fall will urge you to panic and sell.
So who is right?
Rather than trying to predict what the markets will do, we ask ourselves if we would be comfortable owning stocks¸ if we’re unable to sell them for the next 5 years.
This is not as crazy as it sounds. Business owners make this bet all the time. As shareholders we own pieces of a business and it behooves us to think like owners.
So we scrub our portfolio and look for red flags and potential concerns. We think it’s easier to make informed decisions at the individual stocks level than make macro-level decisions where the information is fuzzy and subject to interpretation.
We’re risk averse, we like one-foot hurdles, and hate running blind through a minefield.
Red Flags Checklist
- Master Limited Partnerships (MLPs): Are you an income investor owning MLPs? Here is an excellent article that calls this business model into question.
- YieldCos: Like MLPs, these dividend vehicles are also under threat. Examples are SunEdison (SUNE), Terraform (TERP), and Abengoa (ABGB).
- Roll-ups: Like YieldCos and MLPs, they need constant access to the capital markets to fund their acquisitions and therefore don't do well when the markets close down on them. Examples are XPO Logistics (XPO) and Valeant Pharma (VRX).
- Biotech/Pharma: With "price gouging” coming under scrutiny, here's another group with business model risk.
- Commodity stocks: With China slowing and an inventory glut, be mindful that you don't own the "most likely to fail" in the group.
- “Over-owned” stocks: Stocks owned in large quantities by many hedge funds are particularly vulnerable during a market selloff. Examples are Valeant Pharma (VRX) and Apple (AAPL).
- High China exposure: While hard to completely avoid China if you own multinationals, it is worth thinking about this risk. Stocks that are vulnerable include gaming stocks such as Wynn Resorts (WYNN) and consumer stocks such as Yum! Brands (YUM).
Contact us for a no-obligation complimentary health checkup of your portfolio.
Important Disclosure Information:
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Burr Capital LLC), or any non-investment related content, made reference to directly or indirectly in this research will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this research serves as the receipt of, or as a substitute for, personalized investment advice from Burr Capital LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Burr Capital LLC is neither a law firm nor a certified public accounting firm and no portion of the research content should be construed as legal or accounting advice. A copy of Burr Capital LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request.