The current inflationary environment combined with the slowdown in growth throughout several industries is leading to a short-term period of stagflation. What is stagflation? Stagflation is when you have an economy that is declining with little to no growth with high levels of inflation simultaneously. While I do not believe these economic conditions will last for years; I do believe that the investors have to be prepared for a year or two of no growth. So, what is the best way to play the market for the long-term investor?
Invest in Large Cap Stocks for The Long Term
It’s time to buy large cap names with fortified balance sheets. Stay away from debt ridden companies. Companies with large amounts of debt to service and declining cash flows are going to be in trouble in this rising interest rate environment. It’s now a lot more expensive for debt ridden companies with slowing growth to service their debt. Their borrowing costs have skyrocketed. Companies like Peloton and Bed, Bath, & Beyond are closing stores, firing employees, and cutting costs to try to reduce their debt levels. These companies are trying everything possible to raise cash. This is not the time to get cute with your investing strategy and buy a lot of penny stock speculative names. Speculative stocks and investments should only comprise 5 to 10 percent of your portfolio for the risk adverse. The bulk of your stock investment should be in solid companies with strong fundamentals.
Why Cash Matters
I love companies that are hoarding cash. Apple, which is my largest single stock holding, is one of these cash cow companies. Apple has a beautiful balance sheet. Apple possesses $200 billion in cash and liquid investments, which means it can weather any economic downcycle. I continually add to my Apple position on market down days (which seem to be occurring quite frequently).
Large cap stock companies that are flush with cash like Apple are paving the way for potential dividend increases. They can return more cash to shareholders through raising quarterly dividends or by dispensing one-time large special dividend payouts. I love dividend paying stocks during tough economic times. They allow you to acquire more shares through dividend reinvestments or put some extra cash in your pocket via cash distributions. Companies with lots of cash can also acquire smaller competitors. Smaller innovative companies are great takeover targets during economic slowdowns. They need the funding and resources that larger companies provide. Bank of America was able to acquire Merrill Lynch during the financial crisis and grow its investment services business. Companies with lots of cash can also do stock buybacks. Stock buybacks reduce the number of outstanding shares being traded, which can provide long term value to investors.
The best place to look for companies with strong financials is in the tech sector. Tech has gotten a bad rep of late. While a lot of investors are fleeing tech, I continue to build positions in tech companies. I love the balance sheets of tech companies like Apple, Alphabet, Amazon, and Microsoft. These companies continue to roll out great products that everyone uses while having the cash to survive an economic recession. Now is the time to accumulate shares in large cap blue chip companies whose stock price you don’t have to watch day after day. Investing in large cap stocks will help to keep you on the path to becoming a millionaire even in a down market.