Earnings season is here, bringing increased choppiness and jitters in broader markets as well as individual stocks. However, U.S. equity markets are large and diversified enough to offer investors plenty of choices to not only protect their portfolios, but also to have decent returns. Today, we will look at three safe stocks for an uncertain market.
Since early September, we are witnessing increased volatility in many darlings of the Street. Investors understandably want to know how they can protect their investments in case of a substantial decline in equity prices.
A recent study by Gustav Alpstgen and Sercan Samanci of the Royal Institute of Technology School of Engineering Sciences, Stockholm, Sweden, states volatility “is a measure that captures the degree of uncertainty in the price movements of financial assets… The need among investors to manage volatility has made itself painfully clear over the past century, particularly during sudden crashes and prolonged drawdowns in the global equity markets.”
The authors highlight the importance of managing volatility “either by risk-reducing measures or by making a bet on its direction.” As a result, diversification and hedging are two concepts that come to the fore. Both help investors reduce risk, although the methods for risk reduction are different.
Through diversification, investors may allocate their capital into different types of investments and a range of equities. Thus, their exposure to any asset is limited and a substantial decline cannot cause large damage to the portfolio. Meanwhile, investors or traders hedge to decrease or fully offset losses by having an opposite position in the same or related asset.
Here are three safe stocks for a portfolio in these volatile times:
- Amplify BlackSwan Growth & Treasury Core ETF (NYSEARCA:SWAN)
- Costco (NASDAQ:COST)
- National Grid (NYSE:NGG)
Safe Stocks: Amplify BlackSwan Growth & Treasury Core ETF (SWAN)
Our first stock is an exchange-traded fund (ETF) with an option-based strategy that could be appropriate for a range of portfolios. Holders of the fund have exposure to the S&P 500 index while hedging to avoid significant losses in down markets. Its managers invest close to 90% of the fund in U.S. Treasurys with different maturities. The rest of the holdings are in-the-money (ITM) SPDR S&P 500 ETF Trust (NYSEARCA:SPY) LEAP call options with two different expiration dates.
First a bit of terminology. As an ETF, SPY provides exposure to common stocks of the S&P 500 index. However, SWAN provides exposure to long-term equity anticipation (LEAP) options on SPY. They are long-dated, typically one to two years.
A “call option” is a contract between the owner (buyer) and the writer (seller) of an option. The owner has the right (but not the obligation) to buy an asset, such as a stock, within a specific time, such as a week, month or a year.
ITM means the option has intrinsic value. Thus, the owner of the option contract can sell the security above its current price.
Because the exposure to SPY comes through holding options, SWAN has limited downside risk. That risk cannot be any more than the option premium paid to buy the LEAP options in the fund. And it is about 10% of the total amount invested.
So far in the year, SWAN is up more than 11%. It is important to note SWAN does not provide a hedge (or protection) for current stocks in a portfolio. Investors who plan to buy SPY soon but are concerned about short-term downside risk, and who do not want to put together their own option strategies, may consider buying the ETF.
Costco (COST)
Issaquah, Washington-based Costco is the second-largest global retailer by revenue, behind Walmart (NYSE:WMT). It has definitely become one of the winning stocks amid the novel coronavirus pandemic. Year-to-date, the stock is up more than 28%, which means the shares are in a bull market. On Oct. 14, the stock hit an all-time high. In comparison, the S&P 500 index is up about 16%.
Globally, the group operates close to 800 warehouses. More than 550 are in the U.S. Next in line are Canada, Mexico, the United Kingdom, Japan, Korea and others. It also operates e-commerce sites in most of these countries.
Earlier in September, the retailer announced Q4 and fiscal year 2020 metrics. Quarterly net sales came at $52.28 billion, up 12.5% year-over-year. Similarly, net sales for the fiscal year went up by 9.3% to reach $163.22 billion.
Quarterly net income was $1.389 billion, or $3.13 per diluted share. A year ago, the numbers were $1.097 billion and $2.47 per diluted share. Finally, net income for the year came at $4.00 billion, or $9.02 per diluted share. Last year, the company had reported $3.66 billion, or $8.26 per diluted share.
Investors cheered the results. We’d look to buy COST shares, especially during potential short-term declines.
National Grid (NGG)
Most dividend-seekers put utilities high on their research list, and our last stock, National Grid, comes from the utility-space. The U.K.-based international group owns and operates a significant part of the U.K.’s gas and electricity infrastructure. In addition, it serves consumers in the northeastern U.S.
In June, National Grid released full-year results 2019-20. Operating profit was 3.5 billion pounds (around $4.53 billion), an increase of 1% YOY. However, statutory operating profit was 2.8 billion pounds (around $3.62), a decline of 3%. Efficiency programs meant savings of 100 million pounds (around $129.33 million).
CEO John Pettigrew sounded pleased with the results as he said, “National Grid made good progress in 2019/20. We maintained high levels of reliability across our networks and delivered good financial performance. Asset growth of 9% was underpinned by record investment of £5.4 billion. We achieved continued regulatory progress in the UK, responded proactively to the challenges in downstate New York, whilst further developing our interconnector and renewable portfolios.”
Year-to-date, NGG stock is down about 3%. Demand for utilities tends to stay relatively stable, no matter how the economy or other stocks behave. Therefore, we see merit in holding shares of utilities like National Grid in a long-term portfolio.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.
