This pandemic economy is getting quirkier by the minute. State mandates change daily and we have little idea whether or how the Senate will continue to open the Treasury’s wallet so freely. There may be a national wave of evictions and foreclosures or, well, not. But, in the meantime, boat dealer inventories are scarce1, pet stores are picked through and Heaven help you if you need a plumber or do any home renovation. Real estate in most areas of the country is humming right along, fueled by low interest rates and being shut in for months. A musician I know tells me music store sales are booming. Playing an instrument is something you can do without risking your health.
This is where any responsible financial coach would tell you to rein in spending. Consider yourself told. Though I’m relieved the government has been responsive and proactive to avoid complete economic mayhem, there’s still plenty of opportunity for another crash. But now that I’ve made my obligatory speech, if that’s not your thing, at least be selective with your spending. The same principles of supply and demand that govern stock prices also govern installing sprinkler systems. If an irrigation company has a two-month backlog of work, you won’t be getting a bargain quote if you’re in a rush to get a sprinkler system now.
Those same principles apply to stocks. Home Depot was recently trading close to its 52-week high. The same is true of Lowes, Netflix, Apple, PayPal and Amazon. Now, I’m not saying the sales of those companies will collapse once the pandemic lifts. They’re all fine companies, and there’s even some evidence2 that rising stocks have a (slight) tendency to rise more.
There’s a Greek myth about Icarus, a boy who sought to escape Crete on wings made of feathers and wax. He fell after flying too close to the sun. The pandemic driven sales of these hot stocks seem unsustainable, like the wax on Icarus’ wings.
I don’t want stocks poised to fall to Earth like Icarus. What I’m looking for are the opossum stocks, the ones that are playing dead these days. The market’s attention will shift once more people book cruises, buy cars and hit shopping malls in search of new work clothes (mine seem to have shrunk a little bit over the past two months).
This is a great time to first, examine our portfolios to see if they’re too tied to the past and, second, look for investments that may be beaten down but are poised for a recovery whenever it happens. This won’t be--and it never has been--easy. We can’t buy every stock that’s at a 52-week low. We have to be selective. Some companies may take years to recover, if they can recover at all. So, look at the balance sheet to get some idea about the company’s resources. For companies with little revenue, I might look at their cash burn rates and evaluate how long they have until they run out of cash. If it’s not long, that company’s not for me. But there’s got to be a few opossums out there waiting for when the economy pivots.
1https://www.nytimes.com/2020/07/02/style/boat-sales-summer.html
2 https://quantpedia.com/strategies/momentum-factor-effect-in-stocks/
Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 8225 Natures Way Suite 119, Lakewood Ranch, FL 34202. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth ManagementSM or its subsidiaries.