The long-term bull market is not only weakening; it is becoming a treacherous market according to Mad Money’s Jim Cramer. So, when investing becomes dangerous what are your best choices? Here is some of what Cramer says.
Between the mixed messages on U.S.-China trade and concerns about an economic slowdown, day-to-day stock-picking is becoming very challenging for the average investor, CNBC’s Jim Cramer acknowledged on Tuesday.
“We’ve got to call a spade a spade. This market isn’t just volatile, it’s treacherous,” he said after yet another turbulent trading session on Wall Street. “I don’t want the treachery, which is not going to go away, to get to you. Use it to your advantage.”
The best way for investors to take advantage of the swings is to ignore them altogether, said Cramer, host of “Mad Money.” Instead, he suggested focusing on long-term themes “that hold up through this madness” because they aren’t tied to China or the welfare of the broader economy.
Intrinsic Stock Value
This is the long term investing, value stock approach that uses intrinsic stock value as a guide. As we mentioned in the intrinsic value article, a key to making this approach work is knowing what a company does, how its business plan will make money, and how that business plan will remain viable into the future. In this regard, here are the approaches that Cramer recommends.
Cramer suggests a general approach of picking individual stocks that are not tied to trade with China, are not tied to the welfare of general economy, and have both high dividend yields and strong financial positions. His specific suggestions are cloud-based companies as this sector is growing, health care and pharmaceuticals because people will always need their products and services, and companies in cyber security which seems to be an ever-increasing need.
To his list we might add biotech companies to the degree that you can reliably pick the winners in this arena. And, of course, any company that stands out with more than one of the criteria will be worth a look.
Investments That Will Not Lose Money
What are your other best choices when investing becomes dangerous? Recently we wrote about how to invest without losing any money. We looked at ways to preserve cash in return for foregoing growth opportunities. The four suggestions were these.
- Put money in the bank where it is protected by Federal Deposit Insurance
- Buy US Treasuries, Bonds, Notes, and Bills
- Purchase Investment Grade Bonds, AAA or AA
- Select investments with long term value using intrinsic value as a guide.
Essentially putting all of your assets into cash (bank deposits and government bonds) is a time-honored approach when markets look chancy. Famously, Warren Buffett held a strong cash position going into the dot com crash because he said the market made no sense and thus he was not going to invest until it did!
In Regard to China-Related Investments
China has been the growth story for the last couple of decades. There are investments in China that have done well and investments in companies that do business with China which have also done well. However, all grow stories eventually correct and level off. In today’s China the phenomenal growth story is changing for more reasons that simply getting old or because of the risk of a protected trade war.
Bloomberg has an interesting and useful article about how damage to the Chinese economy from the trade war is already done.
The damage to China’s economy from the trade war with the U.S. can’t be immediately made good even in the case of a resolution with President Donald Trump, Citigroup economists say.
That’s because the tariff war is underlining China’s rising cost of labor at a time when the job market is under pressure, Citi economists led by Liu Li-Gang said in their 2019 economic outlook report. The trade war with the U.S. could cut China’s export growth by almost half next year, putting around 4.4 million jobs at risk, the economists wrote.
“It is a reality that China is losing some of its cost competitiveness, especially in labor-intensive and low-value-added sectors,” according to the report. “Although shifting the supply chains is not feasible in real time, manufacturers may seriously weigh the option of leaving China if punitive tariffs last longer than expected.”
China has become important to the global economy both as a supplier of inexpensive finished products and as a consumer of commodities. A more-expensive China makes products more expensive around the world and will tend to drive supply chains out of China. A substantial reduction in raw material use by China will hurt commodity-dependent economies around the world as we noted in our “resource curse” article some time back.
The bottom line for investors is that China is not the best choice right now for investing by foreigners and especially not by investors who are simply following the herd because the China-investing herd is about to “head south” in a big way.
Likewise, companies that have profited by selling to China, like Boeing, will be hurt in a prolonged trade war.
When Investing Becomes Dangerous What Are Your Best Choices?
All of this is great in theory but how do put these thoughts into practice? Cramer makes several specific suggestions.
Cloud-based businesses he suggests are Salesforce.com, Splunk, VMware and Workday. These stocks will be volatile like the rest in today’s trading but have strong potential for long term growth as computing requires more memory and processing power which will be found in networked computers (the cloud).
His suggestions for health care and pharmaceuticals are United Health Care, Merck, Centene, and Johnson & Johnson.
For cybersecurity he suggests Palo Alto Networks.
In the “strong balance sheet” and “high dividend” niche he suggests AT&T.
If you are going to choose any of these don’t just take Cramer’s advice or ours. Apply the intrinsic value approach to each possible investment along with ways to invest without losing money.
An interesting choice, also mentioned by Cramer, is Microsoft. This company has a strong balance sheet, a huge cloud presence, and is one of the two US companies along with Johnson & Johnson that has bonds with an AAA rating!