The significant price reversal in biotechnology stocks is very meaningful and appropriate, considering the massive capital appreciation the sector provided over the last three years.
There’s a reset going on with stocks, even with the Fed still onside. Earnings are not expected to grow that much in the first quarter of 2014, and big investors are booking profits as investment risk for both new and existing positions is going up.
This has been a very tough market for buyers, as stocks have already gone up in anticipation of decent earnings and revenue growth. There is very little in the way of value for investors, and there hasn’t been for a while.
This choppy action is a good reason not to get complacent when stock market indices are hitting new records. As prices go up, so does investment risk. Portfolio risk management is more important than the expectation for potential returns with stocks. Price trends easily last beyond reasonableness, but as history proves, the bubbles do eventually burst.
Right now is a great time to be reevaluating portfolio risk and identifying great stocks that you’d like to own if they were much better priced. (See “Risk vs. Reward: Is It Time to Cash Out of This Bull Market?”) There’s no reason to be a buyer in a market right near its highs with slowing expectations for growth.
One company that I think is worth having on your radar now is NIKE, Inc. (NKE); a position appropriate for long-term portfolios.
This stock experienced a substantive run up over the last five years, but with this in mind, the stock is often at new highs. The Street forecasts high single-digit revenue growth this year and next, while earnings growth is expected to be in the low double-digits. The company pays a dividend with a current yield of approximately 1.4%. Its latest quarter was very solid, and management said business conditions are holding up well.
There are plenty of other companies I think long-term investors should have on their radar in anticipation of more opportune pricing. As a fan of dividend-paying blue chips, 3M Company (MMM), PepsiCo, Inc. (PEP) and The Walt Disney Company (DIS) are worthy candidates.
But looking back historically; stocks have often experienced long periods of nonperformance after major price breakouts (which is why dividend income is so crucial). Equities are always ahead of themselves and after the strong Fed-induced recovery from the March low in 2009, a significant period of price consolidation wouldn’t be a surprise.
A sell-off in highflying biotechnology stocks and other names that were just their own momentum trades is not startling. But the sell-off migrating from highflyers to blue chips and transportation stocks is another matter.
Even with the Fed so unabashedly onside with monetary stimulus, this market is tired out after such a strong run, and a resetting of equity asset prices is absolutely part of the course. The Fed can offer up as much comfort as it wants; stocks are due for a material break.