The recent 3-5% pullback in markets has caused some to run to the hills. The Evergrande debacle could evolve into something far worse, and all these calls for a correction may be proven right on the money. Now, that doesn’t mean you should sell a considerable chunk of your portfolio, especially if your cash position is already sizeable. Whether or not we’re close to a bottom after a near 5% dip in the S&P 500, you should not derail your investment plan after already taking such a hit to the chin.
These days, strategists at big U.S. banks see a correction anywhere from 5% to as severe as 20%. The actual drop will probably lie somewhere in the range. While I wouldn’t aim to time the markets, I do think it’s only prudent to play defence if your portfolio is in a vulnerable spot. How do you know if it is? If your holdings are down way more than the broader markets, then you may be ill-prepared for a worsening of this market selloff.
Don’t time a 10-20% drop. But please do ensure you’re not in a spot to shed 40-50% in such a drop, with names that could be in the crosshairs of this latest round of panic-selling. That means insisting on value above all else. While value stocks may be losing far less than the white-hot tech stocks that shed 3-5% on Monday, it’s worth noting that names with stretched valuations are likely to lead the downward charge if this selloff drags into October.
Consider Fortis (TSX:FTS)(NYSE:FTS) and Canadian Tire (TSX:CTC.A), two defensive stocks that look like a great value today. While they could eventually feel the effects of Evergrande if a bear-case scenario unfolds, I’d argue that each name has a valuation that’s just too good to pass up on, even if you are expecting the worst to come for the autumn season.
Fortis is one of my favourite bond proxies, and for good reason. It tends to be one of few green arrows on vicious days like Monday. Up 0.4% on a big down day for markets, Fortis stock is a great way to keep your portfolio from falling as hard or as fast as broader markets.
If you believe we’re in the early innings of a 10-20% sell-off, Fortis stock may prove to be a great bet here. The stock is easier to hold during times of rampant volatility and the 3.5%-yielding dividend is investors’ reward for holding through good times and bad.
Fortis may be perceived as a boring, retiree stock for risk-off or bearish investors. Far from the case. I think every Canadian investor should have such a name at the foundation of their portfolios to be prepared for pick-ups in volatility, either expected like the current bout or unexpected, like early 2020.
Canadian Tire stock sagged over 4% on Monday before finishing the day off 3.2%. The resilient retailer now trades at a 9.97 times trailing earnings multiple, making it one of the cheapest discretionary retailers out there. The stock is off nearly 12% from its 52-week highs and could continue to be collateral damage as markets continue to sag from here.
Amid the weakness, expect the dividend, which yields 2.5% today, to swell to and potentially above 3%. Fundamentally, Canadian Tire is firing on all cylinders, with excellent results online and offline. The long-term strategy is still intact, and I’d look for the mid-$170 level as an entry point.
Retail isn’t a typical way to play defence. But the single-digit price-to-earnings multiple, I think, implies a nice margin of safety after a robust year that may yet to be fully respected by investors.