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Trading Ideas

Late Cycle – Investing Ideas for Equity Investors

As many investors get scared off by a mixture of volatility, and the fact we are very late cycle in the market, many investors are looking for places to mitigate risk on the downside, yet still be invested. If you’re one of those people who believes we still have a little more of a run left, or would rather stay invested, look no further. We will provide a variety of names in different sectors to get the ball rolling for investors to take a better look at. The criteria we are screening for is lower beta, good balance sheets (limited debt), dividend yields which are very sustainable, decent valuations, mixed with some growth and in less cyclical businesses.

Medtronic fits the bill perfectly. They are a large cap integrated medical device company with solid underlying growth fundamentals, a very sustainable 2% yield, net debt/EBITDA less than 2, and a beta below 1. Overall this name ticks all the boxes and should provide much stronger downside protection and could do well as many retail investors especially look for cover in the coming time. As a whole, for a more widespread ETF approach, IHI, the medical device ETF also offers a good defensive play with potential upside, with the industry as a whole offering long term tailwinds in hospital spending and growth in developing markets.

Walmart announced a great quarter last week, beating nearly across the board, but suffered a small sell off as a result of potential future retail weakness. In our opinion, weakness in retail could offer just as much upside to Walmart as a strength in the overall sector, with Walmart’s low prices and positioning as a go to place for necessities. In 2008 and 2009, Walmart managed sales growth even with the worst recession in over 50 years! the stock offers a 2% yield with a manageable balance sheet, net debt/Ebitda below 2, and a beta below 0.5, it offers great late cycle potential for someone who wants to be exposed to some retail. Couple this with a decent growth rate, especially online, and Walmart can be the bull in your portfolio keeping you afloat should the tide change.

Defence spending should only continue to grow, and with large backlogs in place, the defence companies such as Raytheon are our choice for industrials late cycle. Although they along with their peers may suffer from cost creeps being late cycle on labour and materials, a company like Raytheon has a solid moat and contracts in place to have one of the strongest revenue visibilities of all industrials. Raytheon of all the defence contractors, possesses the best balance sheet, net debt/Ebitda below 1x, with another small but meaningful 2% dividend. The company is the cheapest of its peers, less than 12x EV/EBITDA, with tailwinds in future defence spending, which they should capitalize on by being integrated fully. Overall, a below 1.0 beta, with decent future growth, offer a safer play late cycle.

For the more volatile tech space, Accenture offers solid revenue visibility with their business to buisness diversified Consulting and IT solutions. With a rapidly growing dividend of 1.8%, and a reasonable valuation around 15x EV/Ebitda, it should offer significantly less downside than any high growth tech or semi stocks in the sector. Their high free cash flow conversion and impeccable balance sheet, with over 5 billion net cash and a strong management team should mean the company is in great shape to capitalize on any weakness in the economy to continue to acquire smaller businesses and grow their business organically.

Red Hat-
For those who are bearish, yet still want to have positive inflation adjusted return, speculating on the Red Hat buyout may work well for a 10% return when the deal closes. Most likely it will be over a year from now, yet there is little to no risk of the deal not closing, meaning for those patient enough to hold will collect a nice 10% over what should be around a year. Overall if you think the cycle is running thin, this could represent the best return potential should the market enter a further slowdown and rates keep rising.

Remember in these volatile times, stay active, stay emotionless, and remember your goals when investing or trading.

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