The Big Short Mk II? How to Defensively Prep Your Portolio!

With star investor Michael Burry betting against US markets and trouble brewing in China, it might be a good idea to brush up on defensive investing!

Aug 21, 2023

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Hello, and welcome to another edition of Investing Intel from the team at ValueTheMarkets! As always, the newsletter is packed with stock picks and investing insights we think you’ll enjoy, including:

👉 Three stock tips

👉 Investing signals

👉 Fear & Greed

👉 Key dates for your diary

👉 Investment strategy insights

Our theme this week is defensive investing. Why? Well, there have been some warning signs over the past week and, while it’s not necessarily time to batten down the hatches just yet, understanding how to ensure your money is protected in times of crisis is a key investing skill.

In this spirit, we’ve got three defensive stock picks, some insights into the aforementioned warning signs, and a quick guide to defensive investing to take you through this week.

Waste Management Inc (NYSE: WM)

Waste collection, transfer, disposal, and recycling are essential services that are needed regardless of economic conditions. This gives Waste Management a stable revenue stream, even during economic downturns.
Waste Management is the largest waste disposal company in North America, giving it significant market power, economies of scale, and operational efficiencies.
Owning and operating landfills is a capital-intensive aspect of the waste management business with high barriers to entry. Waste Management's extensive network of landfills gives it a competitive advantage.
As sustainability becomes more critical, Waste Management has been at the forefront of environmental initiatives, from recycling programs to producing renewable energy from landfill gas. These efforts can lead to new revenue streams and an enhanced public image.
Waste Management's acquisition strategy, like its purchase of Advanced Disposal, has expanded its footprint, customer base, and service offerings. Further strategic acquisitions can fuel its growth.
While recycling is a smaller portion of its business, the company's investments in recycling can yield long-term benefits, especially as more businesses and communities emphasize sustainability.
Waste Management has demonstrated consistent revenue growth and profitability over the years, coupled with strong free cash flow generation.
The company is investing in technology and innovation, such as automated waste collection trucks and waste-to-energy solutions, that could shape the future of the industry.
Waste Management has a history of providing stable and increasing dividends, making it attractive to income-oriented investors.

AT&T (NYSE: T)

AT&T has a significant share of the U.S. wireless market, which continues to grow as more devices become connected and as data usage continues to increase. Meanwhile, the company has made efforts to expand its services internationally, especially in the wireless and pay-TV segments in regions like Latin America.
AT&T is at the forefront of the 5G rollout. The expected increase in speed and connectivity will not only attract more subscribers but can also lead to higher data usage and potential new services and revenue streams.
While AT&T has been historically leveraged, the company has emphasized its commitment to reducing its debt load. As it pays down its debt, the company could see improved credit ratings and reduced interest expenses.
AT&T has historically been one of the top dividend-paying stocks, which can be attractive to income-seeking investors.
AT&T has opportunities to realize cost synergies from its various acquisitions over the years, which can help boost its profitability.
Some investors might argue that AT&T's stock has been undervalued compared to its intrinsic value, representing a potential buying opportunity.

Costco Wholesale Corporation (NASDAQ: COST)

Costco's unique membership-based business model creates a loyal customer base that renews its memberships annually. The recurring revenue from these memberships provides a stable revenue stream and has historically seen high renewal rates.

Costco operates on low margins but high volume, often selling products at prices significantly lower than competitors. This attracts consumers looking for value, especially during economic downturns.

The company's private label brand, Kirkland Signature, has gained significant popularity and trust among consumers. This not only allows for better profit margins compared to branded products but also ensures consumer loyalty.

While Costco has a strong presence in the U.S., there remains significant potential for international growth. Markets like China, where it has recently opened two stores, offer vast opportunities for expansion.

Although traditionally a brick-and-mortar retailer, Costco has been increasing its focus on e-commerce, expanding online offerings, and enhancing its delivery capabilities. This diversification can help them capture a broader market, even though robust foot traffic indicates customers continue to enjoy the in-store experience.
Further diversification comes from Costco’s offerings of services like travel bookings, insurance, and optical exams. These offer additional revenue streams and enhance the value proposition for members

Costco boasts a strong balance sheet with manageable debt levels and significant cash flow, positioning it well to weather economic downturns and invest in growth opportunities.

Costco is known for its strong employee benefits and competitive wages. This not only fosters loyalty among its workforce but also builds a positive public image which can attract consumers who value corporate responsibility.

Investing Signals

Burry Says Worry

A fierce debate has been provoked this week after famed investor Michael Burry, who you might remember as the man who correctly predicted the subprime mortgage crisis of the late 2000s, lodged a $1.6bn bet on a market crash before the end of the year.

Short positions on the stock market now make up more than 90% of the star investor’s portfolio.

For example, Marc Chaikin, the founder and CEO of Chaikin Analytics, told Benzinga that the S&P500 would not decline by more than 10% from its July highs. He added: “There's always a Michael Burry out there, whether it's some bond guy, or whether it's Stan Druckenmiller at some point in time, or Paul Tudor Jones. They're a lot smarter by the way than Michael Burry with a lot more of a track record.”

It’s also worth noting that Burry’s eye-catching predictions are not always accurate. For example, he has repeatedly prophesized major declines in Tesla stock that have not come to pass, while he also urged his social media followers to “sell” in early 2023 before the S&P500 and NASDAQ100 both surged in the first half of the year.

Even so, there are more signs of trouble afoot…

Big Trouble in China?

The second warning shot is China’s deepening real estate crisis. Property development giant Evergrande Group filed for bankruptcy protection in the US last week as the company’s debt restructuring plans appear to lay in tatters.

It comes as China’s housing market continues to suffer through a period typified by slowdown and even negative growth. As you can see from the graph below, price growth halved during the COVID-19 pandemic, before sputtering into the red zone in 2022 and struggling to fight its way out.

There are concerns that the collapse of real estate giant Evergrande and the broader sector could snowball across the Chinese economy, with Nomura cautioning that rising developer defaults would result in declining government revenues and construction material demand, which would in turn impact employee wages and consumption.

There are warning signs elsewhere in China too, with high youth unemployment and stocks hitting a nine-month low. As the world’s second-largest economy, a bumpy road for China could spell major trouble for Western economies too.

US Treasury Secretary Janet Yellen characterized the Chinese slowdown as a “risk factor” for the US economy, though she remained positive about the US trajectory. She added: “China's slowdown will have the largest impact on its Asian neighbors, but there will be some spillovers to the United States. That said, I feel very good about US prospects overall”

Even so, some analysts say there is no reason to panic. Natixis chief economist Patrick Artus commented: "There will be no Lehman effect. There is no amplifying or leverage effect. These will be dead capital losses for investors."

Trending Stocks

VinFast Auto (NASDAQ: VFS)
Hawaiian Electric Industries (NYSE: HE)
United States Steel Corporation (NYSE: X)
Sea Ltd (NYSE: SE)
Cisco Systems (NASDAQ: CSCO)

VinFast Auto tops the charts this week after the Vietnamese electric vehicles outfit debuted on the NASDAQ with an initial valuation of $85bn following its SPAC-led emergence. However, the stock then saw its share price slump by almost a third as the week trundled on, with rumours of future capital raising and share price dilution potentially responsible for the dip.

Hawaiian Electric Industries is among our top trenders for a second consecutive week, with the stock price continuing to fall as investors fear the business will be hit by further fallout from the island state’s tragic wildfires. However, late in the week, the stock staged a minor fightback thanks to the news that it will not seek to restructure.

United States Steel Corporation has also been grabbing headlines as it emerged that the Pittsburgh-based business is seeking a sale, sending its share price higher. Asian internet provider Sea Ltd saw its share price tank after earnings missed expectations, leading analysts to downgrade it.

Finally, Cisco Systems attracted attention after its earnings showed a high degree of exposure to artificial intelligence, exciting some forward-looking investors.

Fear & Greed

The Fear and Greed Index is a measure of stock market sentiment calculated by CNN Business using seven measures, including market momentum, market volatility, and safe haven demand. It’s meant to shed light on the emotions currently driving the market, giving you insight into how traders are making decisions. Remember, traders are humans, not robots.

As you can see from the above graphic, investor sentiment has swung heavily towards fear in the past week. US stocks again finished the week in the red, with the Dow falling by 2.2% and the S&P 500 declining by 2.1%. With defensive sectors like energy, utilities and consumer staples recording the biggest gains on Friday, it appears that the winds of change could be upon us…

Dates in the Diary

Monday 21^st – German PPI (Jul)
Tuesday 22^nd – US Existing Home Sales (Jul)
Wednesday 23^rd – US New Home Sales (Jul) / Canadian Retail Sales (Jun) / Eurozone Consumer Confidence Flash (Aug) / S&P Global PMI Flash (Aug)
Thursday 24^th – US Durable Goods Orders (Jul)
Friday 25^th – US Federal Reserve Chairman Speech / German Ifo Business Climate (Aug)

Investing Strategies - Defensive Investing

A defensive investing strategy is designed to all but eliminate the risk of losing money. It won’t be the kind of break-neck exciting action that can yield enormous returns, but you’re less likely to find yourself penniless if you invest defensively.

But how can you do this?

A typical defensive strategy will involve an individual spreading their investments across reliably steady opportunities, like blue-chips stocks, defensive stocks and low-risk bonds.

For defensive stocks think about low-risk sectors such as the utilities, food & groceries and healthcare spaces, as well as stocks that offer a consistent dividend.

For low-risk bonds, treasury bonds are often viewed as the gold standard.

Beyond this, defensive investors might bolster their portfolio with assets like gold, whose performance is not tied to that of the broader stock market.

While defensive strategies can help mitigate risks, it’s worth remembering that no strategy can guarantee complete protection against market fluctuations. You must consider your risk tolerance and investment goals before implementing any strategy.

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Have a good week!

Investing Intel