A continuation in the 10-year toward and above 3% would lead to persistent under-performance from interest-rate sensitive names.
Biggest winners & biggest losers
In almost every market correction, the year’s biggest winners become the biggest losers during the pullback. This can happen for a couple reasons. First, the valuation has likely gotten a bit expensive and there is a fundamental case to be made for selling and taking profits. Second, when investors seek to reduce risk, they will usually do so by selling their winners first. This creates a bit of an opportunity for patient, long-term investors although they may have to encounter notable near-term pain if the selling continues.
One such example of this is Biogen Idec Inc (NASDAQ:BIIB). Biogen Idec Inc (NASDAQ:BIIB) previously had a market capitalization in excess of $50 billion after building the leading drug portfolio to fight multiple sclerosis (MS). It recently received FDA approval for a new oral version in its MS drug family that is expected to quickly grab market share. The company has seen positive results from hemophilia drugs that are helping shape a more diversified pipeline with still leading growth.
The stock’s price-to-earnings ratio has compressed 15%, but still sits at an elevated 31x. This is somewhat offset by fairly visible EPS growth that is expected to exceed 20% for at least the next two years. There may be an opportunity here for investors to add a growth name that likely has more earnings visibility than others that are more leveraged to Chinese GDP or global growth.
Another such name is BlackRock, Inc. (NYSE:BLK), which also happened to be one of Barron’s 10 picks for 2013. The stock at one point was up more than 40% year-to-date before giving back 15% during the recent market fall. The company is the largest asset manager in the world by a wide margin with almost $4 trillion in assets. It has great diversity in products and most are of the ETF variety, which continues to gain acceptance over actively managed mutual funds.
I would give the firm wide-moat status as it has numerous ETFs with exceptional liquidity. Investors and traders demand this liquidity and thus they continue to seek out BlackRock, Inc. (NYSE:BLK)’s funds. Operating income advanced 12% in the first quarter compared to a year earlier. Long-term investors should favor these types of stocks during pullbacks.
The Foolish bottom line
There is limited evidence suggesting that the cyclical bull market in equities has ended. Long-term investors should continue to position their portfolios toward stocks with competitive advantages and sustainable growth that can be achieved regardless of the direction of interest rates. Investments that have relied on plummeting interest rates are vulnerable right now and best avoided for the time being.
Justin Carley has no position in any stocks mentioned. The Motley Fool recommends BlackRock and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Justin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Picks and Pans for the Pullback originally appeared on Fool.com is written by Justin Carley.
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