Health Care, Cash, Gold, Timber: 10 Market Gurus Make Pre-Election Portfolio Moves

Financial markets hate uncertainty but it is that same uncertainty which often presents investors with the greatest opportunities for profit. Election day 2016 is looming and stocks have been declining as a growing number of investors move to cash. Indeed the latest data from the American Association of Individual Investors reports that cash balances have increased among retail investors, but it also reports that equity allocations remain above historical levels.

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I recently surveyed ten market experts for pre-election portfolio advice. As you can see by the newsletter excerpts and commentary below many advisors are recommending that their clients build positions in cash and gold, others are advising investors buy beaten down sectors like health care. Still others, like value investor James Berman and REIT maven Brad Thomas, are picking individual securities that they think will thrive, regardless of who wins the election.

Gary Shilling, A.Gary Shilling’s Insights:

Today’s security markets are as unrelated to economic reality as we’ve ever seen. Investors seem to care little about slow global economic growth, looming deflation, impotent central banks and frustrated voters turning to extreme populists amidst a mud-slinging presidential election that pits two morally-challenged contenders: a pandering, conniving liberal who will say anything and do anything to get elected and a loose cannon egomaniac who revels in being abusive and unconventional.

Currently, markets are driven by ephemeral developments like innuendo from central bankers and whispers from OPEC officials. We continue to believe the investment themes we’ve suggested for some time are still valid in the longer run, but the current turmoil may be the prelude to major market disruptions in the meanwhile. So we advocate extremely high holdings of cash in portfolios.

Richard Lehmann, Forbes/Lehmann Income Securities Investor

*You want to raise your cash and near cash positions by selling things. Look at reducing equities, junk bonds except for maturities of less than five years and below investment grade preferreds except those by large financial institutions. Closed-end funds as an asset class tend to be hit hard in a crisis, so consider those selling at full value as particularly vulnerable.

*If you have loss carry-forwards, use them this December by harvesting gains.

*Build a cash position of up to 20% with perhaps half invested in a gold (GLD) or silver (SLV) ETF. These ETFs are good counter cyclical holdings.

*Consider municipal bond funds and TIPS as good defensive holdings.

*Commodity and energy funds and MLPs are good for yield and inflation. They have been beaten down so, have less downside risk.

There will be lots of happy talk after the election although I don’t see a lot of substance for it right now. As the saying goes, “May you live in interesting times.” We may soon come to know just what that means.

George Putnam, The Turnaround Letter

A common temptation is to mix emotions with investing. Your candidate won, and so you are more optimistic. Or, your candidate lost, and now you’re more pessimistic. Stocks don’t know who you voted for. Avoiding emotionally-driven post-election buying and selling will be beneficial to your financial health. For more intrepid investors, it can be profitable to take advantage of other investors’ emotions. If shares of good companies are aggressively sold off because of political fears, they could make for a smart contrarian investment.

One such group is the pharmaceutical/biotech industry. Companies in this group are under pressure because investors expect a Clinton administration would go after high-priced drugs. The stocks listed below, along with Perrigo that is covered in our Activist article elsewhere in this issue, appear to have been oversold based on election-related fears:



James Berman, The Berman Value Folio

As wage pressures build and employment tightens, the Fed will have no choice but to hike rates. Though normalization could take some time, the trend will be up. Today’s mortgage rates will look quaint in a few years.

The implications for investors are several:

*Lock in fixed rates now (i.e., mortgages)

*Avoid variable rates for any loans that cannot be easily paid off

*Consider stocks that enjoy greater profitability as rates rise, such as custodial banks like BNY Mellon (BK) and State Street (STT), and payroll processors like Paychex (PAYX)—all of which are in the Folio

*Avoid companies that will be compromised by higher financing costs, such as those that are poorly capitalized and overleveraged

*Keep bond duration as low as possible (under three years), even at the expense of yield.

UTX: Top Pick for Next 5 Years

As the Folio comes to an end, I wanted to write about the one stock I would recommend now for a five-year hold—for those who wish to “set it and forget it.” Such a company would have to fit Buffett’s prime criteria: a wonderful company selling at a reasonable price. It would also have to have an ironclad balance sheet in order to see it through such a long stretch. Finally, it would need some stability and internal diversification.

My top pick to buy and hold for the next five years is United Technologies (UTX), a conglomerate with dominance in all of its underlying business units. In the wake of the $9 billion sale of its Sikorsky helicopter business, UTX is a more focused business than ever. Yet it still has a nice mix of divisions that make it less reliant on any given one. The crown jewels are UTC Climate, a leading maker of large HVAC systems, and Otis Elevators, one of the leading beneficiaries of worldwide “verticalization.”

As Morningstar points out, UTX derives 44% of its sales from servicing revenue and other recurring cash flows, a feature that makes it less of a cyclical industrial conglomerate and more of a cash cow.

According to Trefis, UTX trades at a significant discount to intrinsic value, with a market price 20% below the $124 estimated fair value.

Jon Markman, Strategic Advantage

The looming U.S. presidential election remains a significant area of uncertainty. While the Democratic nominee still holds a material lead in both national polls and Electoral College projections, the contest has narrowed. Stocks may not find a solid floor until the election is over. If the vote is close and lawsuits and recounts are threatened, the decline will likely gather steam a la November 2000 . If the vote is clear, then stocks will have a shot at rebounding from this very oversold condition with a robust thrust back higher. I suspect election night Tuesday will track the polls more closely than many pundits are suggesting, in which case the latter scenario would come into play.

Meanwhile it floors me that half the people in this country have been suckered into thinking the GOP nominee is some kind of great business genius. I’m not addressing this issue on a political level, but as someone who has covered business and finance for a long time. Just in the past month, one of his much-ballyhooed projects in Canada went bust amid mismanagement and a flurry of lawsuits, and the New York Times published an ingenious article based on tax appeals-court filings detailing how the income from the GOP nominee’s properties is most likely far lower than what he has claimed. (Read the NYT piece to the end; it closes on a great anecdote.)

If people really like the nominee’s personality and policies, then by all means they should vote for him — but if they are voting for him because they think the government should be run like his businesses, then they are badly mistaken. He’s gone from one flop to another except for his reality TV show, and his empire is likely held together by duct tape and chicken wire. I’ve seen this before.

Our timing model, MacroSwitch, is in neutral mode. You should be holding cash. The system is up 5x more than the market this year. No way to tell when the next signal will arrive.

Ron Rowland, All Star Fund Trader:

“Our models have already sensed some uneasiness and are starting to raise their cash allocations as a defensive measure. Taking today’s new recommendations into account, four of our five models have cash allocations ranging from 20% to 50%. The one exception is the Global Multi-Asset Income model, which is still able to find ETFs meeting its purchase requirements.”

Brad Thomas, Forbes Real Estate Investor

Regardless of the outcome of the election, I am not placing any bets on the candidate—I am more interested in the potential impact, specifically in the REIT sector. I am fairly certain that the Federal Reserve will increase rates in December. Overall, I remain bullish as it relates to REITs. Many REITs are reporting improved earnings in the third quarter and I will continue to focus on fundamental research. After all, you subscribe to my newsletter for my expertise in real estate, not politics.

One of my favorite timber REITs is CatchMark Timber (CTT).

CatchMark began operations in 2006 as a non-traded REIT known as Wells Timberland REIT, sponsored by Wells Capital, a wholly-owned subsidiary of Wells Real Estate Funds, and advised by Wells Timberland Management Organization LLC, a wholly-owned subsidiary of Wells Capital.

In December 2013, CatchMark completed its public offering of 10.5 million shares of Class A stock at $13.50 per share and raised gross proceeds of $142 million…Unlike other timber REIT peers, CatchMark was not born out of the industrial REIT complex (i.e. paper mills and other forest products) but instead the Atlanta-based company has focused on raw materials only. In other words, unlike Weyerhaeuser (WY), which originated next to the paper mills, CTT was formed to own timberland.

Another differentiator for CTT is that the company has opted to focus on high-demand southeastern U.S. markets—“the fiber markets.” CatchMark currently owns 479,900 acres of timberland located in Alabama, Florida, Georgia, Louisiana, North Carolina, South Carolina, Tennessee and Texas… We favor CatchMark over the other timber REITs based on simplicity. There is minimal cap-ex (so CTT has a higher payout ratio) and as noted, CatchMark does not own sawmills. CTT shares have been trading around $10.60 and yield about 5%.

Michael Lewitt, The Credit Strategist

The next big question will be whether the Fed decides to do the right thing in December and take another step in the direction of normalizing rates with a 25 basis point hike in the Federal Funds rate. That decision should not be affected by the outcome of the election but the Fed has been kowtowing to markets for so long that it could easily do so again. If the Fed does man up, we will likely see further strength in the DXY.

Gold has done little in recent weeks after selling off from its 2016 highs and gold mining stocks gave back some of their gains after a strong rally that in my view has much further to run. Investors should not be timing their investments in gold. Gold is insurance against not only monetary but political disorder and debauchment, phenomena that are endemic to the human condition and are clearly on display. As the United States runs headlong into a constitutional crisis, it is more imperative than ever to buy gold and save yourselves.

Brian Rich, Forbes Billionaire’s Portfolio

As we head into the election, there’s one sector in the stock market that looks especially interesting.

Health care stocks have been beaten up over the past two years. It’s the worst performing sector of the year. Biotech is down around 20% over the past two years. And it’s driven by fear of price regulations and threats from the Democratic presidential race and nominee. Clinton cracked biotech stocks about a year ago when she tweeted that she would take on price gouging in the industry. But that was after Bernie Sanders presented a bill to curb prices. The perception for the industry is that Clinton would try to curb “excessive” profits at the pharma and biotech companies… That said, it’s probably time to buy. It looks like a classic “sell the rumor, buy the fact.”

As we know, regardless of who wins the White House, the promises and threats on the campaign trail rarely become policy. And Clinton is known to be friendly to the industry (collecting money for industry speeches in the past). A Trump win would almost certainly send this sector on a tear higher.

Taesik Yoon, Forbes Investor

Uncertainty ahead of the election could extend the current market slide through Tuesday. Fortunately, there is still plenty of time to make up for lost ground should that prove to be the case. We also have history on our side with data by S&P Global Market Intelligence showing that the S&P 500 has risen in the two months following Presidential elections 73% of the time regardless of who wins.

A key reason cited for the frequency of this post-election market bump is the general relief that comes from the end to this uncertainty. Of course, there’s no guarantee that’ll be the case here. After all, the current election cycle has been like no other. So, I wouldn’t be surprised if the market’s reaction to its outcome also strays from the norm.

Nevertheless, despite the resilience that stocks have displayed for much of this year, the recent pre-election market sell-off has cut the year-to-date gains in the S&P 500, Dow Jones and NASDAQ to a meager 2.2%, 2.3% and 1.0%, respectively, (through yesterday’s close). Thus, while I won’t be surprised if the market remains depressed through Tuesday or if suffers a brief but sizable knee-jerk sell-off shortly thereafter on a Donald Trump victory, I think that the final two months of the year will prove favorable overall for stocks.

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