Five Stocks To Protect Your Portfolio From A Falling Dow

If there’s any time to be weary of the U.S. equity markets, now presents no better time.  It was just a few short years ago the Dow Jones Industrial Average crossed over the 14,000 mark and most investors continued to dump money into long positions.  Day after day, CNBC’s scrolling headlines highlight the day’s advances with special notice towards “Dow is so many points from an all-time trading high.”  These marketing ploys by media drove attention to the greedy nature of climbing stock prices without giving due attention to the fact banks were in trouble, and the country was about to see what “financial crisis” really meant.

The one thing I’ve learned in this life is that history will repeat itself.  Often.  It always scares me when the cover of magazines read like the market is going to bring upon the Second Coming of Christ.  Although we hope and pray that would be true, reality does suggest we are in for a huge awakening in the midst of our euphoria.  While kids were running around the yard as parents high-fived over their IRA and 401(k) statements, looming around the corner was the biggest reality check this country—and world—has seen since 1929. 

Lehman Brothers filed for bankruptcy, Merrill Lynch collapsed, AIG almost went belly up, and Citigroup needed billions of dollars just to keep its doors open.  The collapse of these Wall Street behemoths was just the tip of the apocalyptic iceberg.

Now our equity markets are boasting over 100% returns since the collapse of 2008.  Once again, the headlines read, “Wall Street is Back,” on the Economist and similarly copied ad nauseum over financial and news periodicals.  I would be remiss if I ignore the fact: The higher we climb, the further we can fall. 

We see big banks are beginning to lend again, innovators on Wall Street are moving the merger and acquisition markets along; it all smells too familiar for comfort.  The glaring question is, “if I’m right, where do I put my money in when the Dow continues to climb over new territory every day?”  This is a question that should be on the tip of every American investor’s tongue… now.

The Reasonable Approach

Erring on the side of caution should be your priority when choosing when to move assets to protect the rise in your net worth.  Unlike the scores of over-analyzed situations, I’ve been able to sift through the madness and settle in on the one thing the good Lord gave me… common sense.

I would imagine when times are good… people drink.  When times are bad… people drink.  Safe to assume the one observable constant is alcohol consumption.  Brown-Forman BF is the manufacturer of Jack Daniels, Korbel, Southern Comfort, and many more distilled spirits. This stock is resilient to economic collapses, which can be seen in the stock’s performance in the 2008 debacle.  Only 25% of the stock price was shred while everything under the sun was becoming a “zero-job.” This company is not only on my list of must-owns, but even Motley Fool lists them as one of the 25 best companies in America.

Take a close look at Energy XXI EXXI to put in your portfolio.  They are a successful gas and exploration company, which boasts over a 75% success rate in their exploration assets.  One of their more recent accomplishments is a $51 million purchase of land to drill that brought a net present value of $283 million. Energy XXI just began a $250 million stock repurchase program and offers a dividend of $0.48 per share.  With the Dow over 15,000, I see Energy XXI as a defensive play against larger oil companies due to their malleability to uncertain and risky environments. 

Another interesting play is found in Aegerion Pharma AEGR.  Their main course of business is to produce drugs and therapeutics that treat debilitating and fatal diseases.  The treatments they give for people—patients with LDL cholesterol over 300—are very expensive, coming in at $300,000 per patient, per year.  Analysts believe they will have over 750 patients next year, which amounts to over $200 million in revenue and $62 million in profit.  The stock has already reacted to this news, but below $65 per share, it still is a healthy and safe purchase.

Far East Energy Corp. FEEC is interesting not because of what they do, but who owns them.  Taking a close look at the insiders of this company, you see the biggest names in the financial business, including BlackRock and Prudential.  These two mutual fund giants own 16% of this tiny company and for good reason…they keep hitting large wells over and over again.  So far, they have proven reserves of 51.3 billion cubic feet.  Their assets are in China, hence the name “Far East.”  With these power players behind this company and at current valuations, there isn’t much room for failure, and this is why I’d purchase this company right away before another mutual fund decides to buy, then your time for capitalizing on this business is over.

Last, but certainly not least, is a stock to own.  It is 50% off of its 52-week high... ActiveCare ACAR.  They are the world’s largest provider of cellular glucometers.  If that’s Greek to you:  ActiveCare is the world’s largest provider of mobile blood-glucose monitoring.  Because of Obamacare, they’ve capitalized off of the flight to self-insurance.  Their current 10-Q (ending March 31, 2013) had shown a leap in gross profit, from $180,000 to $4 million in just one year.  The stock hasn’t reacted to this news yet, which is interesting, but rest assured, I don’t believe it will be down where it is for too long.  At $1.50 per share, it’s certainly a buy without fear of a collapsing market.  With or without the Dow being at 15,000, companies like ActiveCare will benefit from the changing healthcare environment.