01.06.2012

Defensive Means Aggressive

01.06.2012
Terry Flanagan

A highly volatile market in 2012 is forcing traders to be defensive; for some, that means aggressive on finding opportunities.

Investors are being advised to stay defensive within their portfolios. While hedging investments has been typical in most market cycle, a renewed sense of risk management has resurfaced in 2012. That means a return to blue-chip, well-known value stocks for some.

Despite the especially heightened inherent volatility within the equity markets, Sabrient Systems’ Chief Market Strategist, David Brown, advocates that investing in growth stocks is the best way to stay defensive in one’s portfolio.

“The best way to be defensive in 2012 is to use GARP (Growth at a Reasonable Price) stocks, because many of them have cash. You can’t take money now from 10 year treasury bonds,” he said. “Commodities such as gold and silver are pulling back from all time highs.”

As some trends loose momentum, Brown noted that investors should be trading stocks that are favorably priced, which also provides, “downside protection.”

“The key is to invest in growing companies that have a lot of cash in reserve. Having cash at hand makes companies less volatile, and those who are prepared for a down economy can better take opportunities,” he noted.

Many companies have attained a cash-rich position via mergers, acquisitions, and buy-outs—a trend that will continue in the year ahead, noted Brown. Investors will be rewarded via dividends

However, some growth companies, especially those that are young, are largely characterized by leverage—something to avoid in an uncertain market, according to Brown.

“You want growth in your portfolio, but be mindful your growth companies are not highly leveraged. I’m not a big fan of leverage because it entails risk,” he said.

Though, leverage can often be imbedded in newer growth stocks, so investors and traders must not forget about the core principals of hedging—mainly though options overlay programs.

“Option overlays strategies can be a clever way to get into these (leveraged) stocks, rather than longing them outright,” said Luke Rahbari, partner at options asset manager Stutland Volatility Group.

Sabrient Systems is a quantitative research firm that utilizes in-house models to help buy-side portfolio managers make trading decisions.

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