"5 Investment Mantras for 2016"

5 Investment  

Mantras for 2016

1. Count on corporate cash

Cash is king, and companies with cash are the kingmakers. This advice isn't new, and Subramanian isn't the only one giving it. But her support, rooted in quantitative, relatively emotionless data, underscores the seriousness of the global debt crisis and the need for investors to be especially proactive, selective and opportunistic.

Indeed, when corporate earnings growth is scarce and slowing, an old Wall Street adage holds that the
market prices growth like diamonds.

Yet growth isn't enough nowadays. For Subramanian, it's crucial that a company show stability in addition to growth. This strategy favors shares of companies with predictable and reliable services or products and a history of increasing dividends.

To boost dividends regularly a company needs to manage its cash responsibly. The same goes for companies that buy back stock, which reduces supply and enhances earnings per share. In these ways, companies tell investors that management is focused on maintaining a high-quality, unburdened balance sheet.

These are the type of stocks Subramanian likes in this market, especially when high-quality is on sale.

Accordingly, she said, stock investors should favor large-caps over small-company shares, and stable-growth stocks over cyclical, volatile assets.

"You saw at the end of 2008 that the companies that survived had the strongest liquidity," Subramanian said. "If we do get into a more serious recession, and a global and U.S. recession, then it's really time to focus on companies that are self-funded, don't need to rely on the capital markets for growth, and have a strong enough cushion to get them through the downturn."

2. Stick with consumer staples

Consumer staples is an obvious defensive move, but an unpredictable market calls for predictability. Staples stocks reflect three key themes in Subramanian's work: dividend growth potential, high dividend yield, and earnings growth.

Moreover, the staples sector is unloved by fund managers, who prefer health-care stocks for their defensive line, Subramanian said. In addition, she noted that while utilities and telecommunications firms sport higher yields than the staples sector, consumer companies typically have a lower so-called dividend-payout ratio — meaning they have greater potential to increase dividends.

3. Connect with technology

A bullish call on the cyclical technology sector seems out of step with a defensive-minded strategy, but on a quantitative basis technology companies rank high on valuation, upside earnings revisions and price momentum, Subramanian said.

Put simply, tech has the potential to deliver the earnings-growth goods.

"Tech has sort of grown up," Subramanian said. After the dot-com bubble burst just over a decade ago, tech companies consolidated operations and brought discipline to their spending, she said. As a result, tech nowadays shows lower earnings volatility while other cyclical sectors, such as industrials and materials, have become more volatile.

"The big drivers are larger-cap tech stocks that basically got very cash rich," she said.

4. Pick stocks, not indexes

A rising market lifts all boats, but a choppy market tosses vessels on the rocks. That's why Subramanian advises investors to focus on companies with more stock-specific risk, rather than buy an index that is subject to market risk.

Stock-specific means a company that is relatively insensitive to any of the numerous missiles that rain daily upon a sector or the broad market. Subramanian's research team finds these candidates by studying the return relationship of a stock versus its industry group over the past five years.

These are, she said, "stocks that act like stocks." Buyers enjoy a certain advantage investing in a company that has a low correlation with the market and its industry, she added.

5. Minimize market risk

If you're an index-fund investor, the most timely strategy now is to focus on sectors and industries where stock-specific factors drive performance, Subramanian said.

Industrials, for instance, are highly impacted by economic and overall market conditions, she said. Energy, materials, utilities and financials are also sentiment-driven sectors.

Instead, emphasize areas of the market with the least sensitivity to external factors, Subramanian said. "Pick your battles in sectors that have lower inter-stock correlations," she noted — meaning sectors in which stocks tend to act more independently.

Which sectors are those? Retail, technology, consumer discretionary, and health care, in particular.