3 spooky October stocks to dump now
Get rid of defensive issues that performed well in the last month -- before they flicker out.
By Jamie Dlugosch
The fear trade worked very well in October. While it has been a great month for investors it has been even better for those who played it safe.
The biggest winning sectors so far this month were telecoms and consumer staples. These two traditionally defensive groups have significantly outperformed the overall market. The SPDR Consumer Staple (XLP) is up a 6.4 percent so far this month. The iShares Telecommunication (IYZ) is up 5.2 percent.
But that performance is going to fall back to earth in November.
The reasons for the outperformance were fairly obvious at the beginning of October, traditionally a tough month for investors. Some of the largest market declines happen in the month.
In addition, investors were faced with the debt ceiling debate that at the start of the month was far from being resolved. No wonder market participants gravitated to defensive issues like consumer staples and telecom.
Time to get aggressive
Now with those issues behind us look for a more aggressive posture to be taken in November. You’re going to want to sell those defensive stocks and look for beta – stocks that are more volatile than the rest of the market – for the remainder of the year.
A year-end rally is likely with little in the way of headwinds. There will be no taper talk until at least next year. As such, bond yields will drift lower further enticing the risk on trade.
Here then are three defensive stocks to jettison from your portfolio now:
Exxon Mobil (XOM)
I get that there is a renaissance in the oil industry – mainly a boom in domestic production. That doesn't mean owning a vertically integrated monster oil name like Exxon Mobil makes sense. In this market it doesn't make sense. Investors gravitated to the stock thanks to its near 3 percent dividend. The best case scenario is that Exxon shares gain 5 percent in the next year. Add the dividend and you have a solid 8 percent return. That doesn't cut it in a risk on environment. Investors made 3 percent on this name alone in October. Look for weaker returns to close out the year.
One of the biggest winners in October was AT&T. The stock gained more than 7 percent in the month. Clearly investors were attracted to the company's 5 percent dividend yield. They also got a stock that beat earnings estimates for the third quarter. That defense made sense in a month filled with fear.
Expect the opposite for the remainder of the year. From a valuation perspective AT&T is simply unappealing. Analysts expect the company to grow profits by 8 percent in 2014. At current prices shares trade for 15 times 2013 estimated earnings. That’s flat out spooky. Clearly investors have bid up the share price as they chased the yield, but as the fear trade abates look for AT&T to underperform the market for the rest of the year.
Procter & Gamble (PG)
If you ever want to gauge the fear level in the market look no further than a stock like Procter & Gamble. This slow growing consumer staple behemoth gained nearly 8 percent in October. That just isn't right.
If you own the stock you should cash out those big gains immediately. What you got in one month is what you can normally expect in a year out of this company. Going forward I would expect some sort of reversion to the mean. The 3 percent dividend is nice and all, but not if the stock retreats from current levels. With the company expected to grow profits by single digits and shares trading for 19 times current fiscal year estimated earnings, I'd stay far away from this spooky stock.
Jamie Dlugosch does not own or control shares in any issues mentioned in this article.
More from Traders Reserve
XOM AND PG I'VE OWNED FOR YEARS THEY ARE DIVIDEND ARISTOCRATS... THIS WRITER IS A FOOL...BOTH OF THESE STOCKS HAVE RAISED IT'S DIVIDEND EACH YEAR FOR AT LEAST 25 YEARS...ALSO XOM HAS BEEN BUYING BACK IT'S STOCK FOR YEARS
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