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Does your partner shop at Target?

  • US stocks in “bear market”, dropping 20% from recent highs
  • micro-cap stocks are generally more volatile and riskier investments
  • for investors, liquidity has value, especially in times of volatility, so buy “big”

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There are times to invest in micro-cap stocks but when the markets have a big sell off, like they’re currently having, the first place to look for bargains is often large cap stocks.

US stocks have entered a “bear market,” a drop of 20% or more from their recent highs, ending a bull run that started in March 2020. Inflation is at 40-year highs, the Fed is raising rates, Russia’s war in Ukraine has spiked energy and food prices, China’s lockdown is impacting supply chain issues. There’s a lot going on with no quick resolution to many of the issues.

SP500 bear market - The Oregon Group - Investment Insights

That said, it does not mean that there are no investment opportunities — “buy the dip” is something of a cliché for a reason — and in a bear market there are opportunities to buy stocks at a discount, especially for those able to hold their nerve and have a time horizon beyond the immediate.

A good investor needs more than just a good discount. You need liquidity to be able to move your money to seize the opportunities available at short notice. Cash is king, especially so in a bear market. Investors need to be mindful of their sources of liquidity and the agility that comes from having liquid securities and cash, particularly over a portfolio of micro-cap stocks and private investments. 

So, where is the best place to look for buys in the current environment?

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I like to think about things I know. 

Professional investors and analysts talk about having an “edge” or some sort of insight into the market. What you likely don’t realize is that you also have an “edge” — yourself, your family, your friends. You know where you shop, you know where your family eats, what your kids like, don’t like, what brands are in, what services are out. This knowledge should be a crucial part of your investment strategy.

So, does your partner shop at Target? Do your parents shop at Costco? Does your brother shop at Walmart? 

I don’t know your family but the statistics suggest some of these people are shopping at the places I just mentioned. In the first quarter, Target’s total revenue increased by 4% to $25.2bn, driven by sales growth of 4.0%. And, between January-March, US consumer spending rose 3.7%. Walmart posted increased sales of 3% at stores open for at least one year in its latest quarter. Costco’s total revenue rose 16% to $52.60 billion in the quarter.

target revenue 2022 - The Oregon Group - Investment Insights

This is not just a “buy into the brands you shop at” spiel, neither is it a “focus on consumer spending” argument, which is extremely fragile with the rising cost of living.

Target’s stock has dropped 40% in the last few months from highs in 2021 when it was one of the best performing retailers during the coronavirus pandemic, after reporting a 52% drop in profit blamed on higher costs on supply chain issues and a shift in consumer spending. It’s the same for other retailers like Walmart whose stock price has posted its worst day since 1987.

So what gives?

In times of duress, or “risk-off” in Wall Street parlance, funds sell anything and everything. This is what we have seen in recent months. Much of the selling for overvalued tech companies is likely well warranted, but oftentimes in these moments of risk-off, few stocks escape unscathed.

Instead, as you consider how and where to allocate your funds for the rest of the year when so many stocks are falling, is to think first about the large cap stocks. It doesn’t necessarily matter whether it’s Target, Costco, and Walmart or Apple, Microsoft and Coco-Cola. They will all be able to generate and raise cash, as well as tap into cash reserves, with potential to diversify and see out the downturn.

Focus on these large cap stocks initially as you rebalance your portfolio. The reason: in large cap stocks you have liquidity and businesses better able to ride out any potential recession. They are traded in big volumes so, pretty much whatever the price, there will always be a buyer for your stock. You can buy them and sell them hundred times in a day. Even if they take a tumble, they’re still selling and growing. The recent dips can make them only more attractive. And with liquidity you can quickly open and close your positions, so you potentially carry less risk and can move your money to the next opportunity.

A good investor needs more than just a good discount. You need liquidity to be able to move your money to seize the opportunities available at short notice. Cash is king, especially so in a bear market.

Anthony Milewski — The Oregon Group

Micro-cap stocks generally have a capitalization of between US$50-$300million and are often more volatile and riskier investments. This means the returns may be significantly higher and faster. The risk with small cap stocks is that sometimes you don’t have liquidity. When the stock goes down, it doesn’t always come back up in a hurry as the companies do not always have the financial resources to support a stable stock price during a downturn.

Don’t get me wrong, I love moonshot micro-cap stocks just as much as the next person but, for most investors, I feel their risk profile is a completely different proposition in a risk-off scenario: you buy a micro-cap stock whenever you want but you sell it when you’re allowed. 

Target stock may have fallen, but people are still buying their goods and their stock.

There is significant value in liquidity and this is often underestimated, especially in times of volatility. So big thought for the day is — buy big.

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about the author

Picture of Anthony Milewski

Anthony Milewski

Anthony Milewski has spent his entire career in the capital markets, including as company CEO, board director, advisor, founder and investor, with a focus on the energy transition and commodities.


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