July is almost over and from the look of things, investors could be forgiven for thinking nothing much has happened in the market since stocks are basically flat during this time. What would be missing from this observation is the choppiness that has hit the market recently, as earnings and exogenous factors like international turmoil send stocks seesawing.
In the attached video, Lincoln Ellis of Green Square Capital gives us his take on how to stay on top of this market. Ellis claims Green Square Capital has been defensive for almost 2 years, and performance has been just fine. It is an interesting statement considering the market is up around 46% in that time, a period where being defensive would be a drag on returns. Ellis’s definition of defense is a bit broader though, as one of his funds was equal weight the companies in the S&P 500 (^GSPC), instead of market-cap weighted, and he removed the financials from the equation.
Ellis explains that while his general allocation for the S&P 500 is equal weight, he tends to favor the defensive parts of each sector by locating companies with high cash levels and yields that top a benchmark like the 10-year Treasury Note (^TNX). Here are a few of his top picks in a two sectors.
Microsoft (MSFT): Ellis’s big reason for owning Microsoft is that it has a “huge money printing machine called Windows. There you go.”
Cisco (CSCO): companies like Cisco are “technology utilities at this stage of the game, Cisco is a very deeply embedded part of both corporate cap-ex and through Linksys and other product channels, into the home. So we like the stability of the cash flow that that activity provides.”
“They are very stable names, they have very large cash balance sheets in spaces where, as health care begins to mature, and we deal with this baby boom revolution, those [drug] pipelines coming to fruition and having a population on which to foist their wares, it seems to us the thematic is in place,” he says. In addition, the dividend yields are growing for both companies as well.
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