As new geographical hotspots featuring the coronavirus’s presence continue to appear almost daily in the global media, it seems highly probable that a sustained breakout throughout many U.S. states is almost inevitable. As stocks enter correction territory, irrational behavior might prevail in the coming months causing even further selling not based on fundamentals. Bear markets and events are situations where active managers can outshine index funds, which is why I took action and sold a solid chunk of my active portfolio to buy The Clorox Company (CLX) and 3M Company (MMM). These stocks could outperform the market by a wide margin in the coming months, and they will be easy for me to sell in a recovery as I expand my long-term portfolio holdings once the crisis is mitigated.
Image is a logo from Clorox.com
As the coronavirus spreads across the globe in new and exotic ways that are hard to trace back to a China source, U.S. markets have finally started to take the pandemic seriously after a rapid market correction from recent highs that has so far bucked any rebound attempts.
This correction, and the failed rebounds, have prompted me to take direct action in my actively managed portfolio as the markets and world have to start taking coronavirus more seriously. I currently manage two portfolios (each ~ equal in size) including a more passive one made up of mainly mutual funds and a few conservative stocks along with an actively managed fund made up of hand-picked stocks that I routinely hold or rotate through over time. All in all, I try to maintain about half a dozen mutual funds and 50 individual stocks spread throughout the sectors in traditional times.
Coronavirus though has altered my approach this year, starting now, as I have sold off a significant portion of my regular stocks (~25% of my actively managed portfolio) to focus on more defensive plays. Here is a list of the stocks that I took the opportunity to sell as the market enters correction territory.
|Wells Fargo||Dropping interest rates.|
|J.P. Morgan Chase||Dropping interest rates.|
|Goldman Sachs||Dropping interest rates.|
|Advanced Micro Devices||Sell near the highs.|
|Nvidia||Sell near the highs.|
|Duke Energy||Energy and not defensive enough.|
|Dominion Energy||Energy and not defensive enough.|
|To alter my future FANG holdings.|
|Under Armour||Global slowdown.|
|VMware||Unwanted future tech position.|
Table by Trent Welsh
As you can see, I sold off about 25% of my individual stock holdings that I believe could suffer the most in the coming months. Now, here’s a list of the stocks that I decided to keep as a part of my active portfolio.
|Apple||Long-term core position I hope to add to.|
|Alibaba||Long-term core position I hope to add to.|
|Amazon||Long-term core position I hope to add to.|
|Mercadolibre||Long-term core position I hope to add to.|
|StoneCo||Long-term core position I hope to add to.|
|Disney||Long-term core position.|
|Macy’s||Love the dividend and hope to add.|
|Royal Dutch Shell||Love the dividend and hope to add.|
|Arrowhead Pharma||U.S. biotech long-term hold.|
|Sarepta Therapeutics||U.S. biotech long-term hold.|
|MiMedx||U.S. biotech long-term hold.|
|Summit Therapeutics||U.K. biotech long-term hold.|
|Eli Lilly||Long-term core position.|
|Uber||Long-term hold that I hope to add to.|
|Lyft||Long-term hold that I hope to add to.|
|Hi-Crush||Hope and prayer stock that I hope to add to.|
|Virgin Galactic||Hope and prayer cult stock that I love.|
|WWE||Stock poised for a nice turnaround.|
Most of the stocks that I have left are long-term core holdings that I believe should be fine over the coming decades even if they drop more in the coming months. If the correction continues, I plan on adding shares at far better price levels. Or, if a rebound occurs, I still have the stocks I love best as a base for future increases. I plan to stockpile additional incoming account cashflows until at least a 20% market correction occurs, or a clear rebound in the market can be seen as coronavirus fears justifiably fade.
I decided not to keep the newly created funds from my former stocks in cash as I am a firm believer that there are always opportunities in the market. Instead, I decided to purchase a couple of stocks that I think might directly benefit from the possible fallout of coronavirus alongside irrational investor fears and behavior. The stocks that I bought were Clorox and 3M, which have significantly outperformed the market since the heavy selling began from the week beginning on February 24, 2020.
I put the majority of my newly redeemed funds into Clorox as it now represents ~17% of my active fund, or ~8.5% of my total portfolio. Its name brand Clorox bleach, Clorox wipes, and multitudinous other cleaning products are potentially obvious winners in a sustained global health crisis, even as the company is currently exploring new 52-week highs.
Clorox’s latest earnings call already highlighted strong sales volume growth across a number of its product lines, including Clorox disinfecting wipes, even as the company struggled with flat organic sales growth. Clorox has had time to ramp up production of its key cleaning products over the beginning of the year as coronavirus slowly spread in China. This means that it could be able to benefit nicely, for a quarter or two at least, from far greater global demand for many of its key products instead of being caught unprepared for a global surge in demand with empty store shelves.
With a current ~$21B market cap and a modest $1.45B in revenue last quarter, Clorox could potentially see a marked surge in earnings growth complete with upward earnings guidances and revisions. Demand over the next 3-6 months for Clorox products could skyrocket as schools, businesses, and homes across the globe increase their cleaning demands significantly.
I made a smaller bet on 3M as that company now represents ~7% of my active fund, or ~3.5% of my total portfolio. 3M is a slightly less obvious coronavirus play as its N95 respirator masks are now in short supply across the globe. Increased mask demand could account for some huge media and headline tailwinds as its masks are the best mass market option out there for dealing with the coronavirus spread. The Health and Human Services Secretary reported that the U.S. currently has a stockpile of ~12M masks, though the U.S. might need up to ~300M masks in the case of a major domestic outbreak.
The main reason that I bought 3M is because it makes the highest quality masks available for mass consumption, and people will want the best in the case of a prolonged domestic coronavirus outbreak. However, mask revenues for the much larger ~$86B market cap 3M are a currently insignificant portion of its revenues. This fact is unlikely to change over the next few months, as the company can’t snap its fingers and make 300M masks or more available across the globe.
However, the masks, and thus 3M’s stock, could benefit from an impressive media tailwind over the coming months if news reports regularly feature people using 3M’s masks and outline the direct benefits from such use. Investors in crisis situations could easily steer their investment decisions more towards “safer” stock options, such as 3M as a leader in virus deterrent equipment, regardless whether the fundamentals for a significant rise in share value are warranted or not. As an added bonus, 3M’s poor performance over the past year helps mitigate the company’s downside risk as it has already suffered markedly for its recent underperformance.
My intentions are now to sit tight with my current portfolio of stocks and mutual funds while slowly building up cash over the coming months. I plan to wait patiently for an additional ~10% drop in the market from its recent highs to potentially begin buying equities again unless there is a clear turnaround or slowdown in the global coronavirus spread. The aim then could be to hopefully sell the outperforming Clorox and 3M stocks to bolster my long-term holdings as well as expand my portfolio back out to roughly 50 individual stocks again. Best of luck to all.
Disclosure: I am/we are long CLX, MMM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.