Stocks strongly rebounded Tuesday and ended a three-day omicron-driven slide as the potential of U.S. lockdowns diminished after President Biden reassured the public of his Covid strategies. Also, great corporate earnings from Micron (MU) (a supplier of the basic building blocks in semiconductor technologies) and Nike (NKE) showed that the worst of the supply chain issues are over, we're heading for better times. Lastly, the market entered a seasonally strong period - Santa Claus rally.

Big market turnarounds like what happened yesterday are why we constantly preach the importance of staying the course. When the market has that "sell everything" mentality, you may want to panic and sell everything to follow the downside. But if you come to think about it, how can you outperform if you do what others are doing? Panicking is not a strategy, especially with the time and efforts we've spent researching and building our stock positions. Instead, try taking the other side of the trade during times of turmoil.

That’s what we do. We dip into our cash position (typically a 5% reserve, in preparation for a market-wide sale) and opportunistically look for things to buy. Not all our buys will be at the bottom of the stock's trajectory. In fact, we never expect our buys to be at bottoms, as we always want to have plans for additional buys at lower levels or exit plans if need be.  

As we head into another trading day, we are not going to try to predict what the market may do because that is a sucker’s game. But one thing we can say for certain is that if the market gets hit further and we find significantly lower prices on our favorites, our opportunistic approach of looking for stocks to buy will be the same. If you take a step back, the uncertainties facing the market right now are not different from what the economy has overcome in the past almost two years. We’ve gone through variant-driven stretches like this before, and it has always turned out ok.

In light of what we said about needing to have a shopping list and be ready to buy at lower levels, today we want to give you an overview of sectors/stocks you should have in your portfolio for 2022. 

1. Healthcare is a group we continue to emphasize. They are defensive and can grow earnings even in an economic slowdown. Also, drug stocks are winners from the potential blocking of the Build Back Better plan because one of the provisions would have allowed the government to negotiate directly with pharmaceutical companies on the price of certain drugs.

• In the portfolio, we love Eli Lilly (LLY) at the current price more. The stock has fallen about 6% from its post-Investor Meeting high, and we continue to favor this pharma name for its volume-driven growth, blockbuster-rich pipeline, and continual operating margin expansion.

• We're eyeing other names in the field, including Abbvie (ABBV) for its huge dividend yield and think the market has underappreciated its ability to replace Humira sales, but it is a bit harder to chase this one after the significant outperformance in the past month.

2. We also continue to emphasize the financials because they are cheap on earnings, have solid dividends, aggressive share repurchase programs, and tend to outperform when the Fed raises rates.

• As you know, our favorites are Wells Fargo (WFC) and Morgan Stanley (MS). Wells Fargo is more of a restructuring story because of its cost-cutting initiatives and the asset cap, but it’s also a great way to play higher interest rates. Morgan Stanley is not interest-rate sensitive. Instead, Morgan Stanley’s business model emphasizes fee-based and recurring revenue streams. Investors are willing to pay more for fee-based and recurring revenue streams because they are predictable and easy to forecast. As fee-based and recurring revenue streams become the majority of Morgan Stanley’s total revenues, we think the market will reward MS by applying a higher price-to-earnings multiple on the stock.

3. We think investors should not sleep on mega tech, the FAANG+M stocks — Meta Platforms (FB), formerly Facebook, Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Google parent Alphabet (GOOGL) — and Microsoft (MSFT). All of these companies offer investors growth at relatively reasonable price and provide exposure to some of the best secular growth trends in tech. These particular names are far cheaper than the cohort of concept-tech stocks that earn nothing and will remain volatile as the Fed tightens and tapers. During uncertain times, investors love buying this group because of their indestructible balance sheets and strong management teams.

4. Oil prices may have been off recent highs by a high amount, but we still see strong demands and thus we don't see prices going lower any time soon. We've recently built Chevron (CVX) into our portfolio. Its 4.78% dividend yield should help the stock find support with interest rates as low as they are. And as we have explained in the past, Chevron has the cash flow to cover the dividend even at lower oil prices because of their cost and capital discipline.

5. Last but certainly not least is Costco (COST), our favorite consumer staple stock which we have missed since April 2020, when we chose ship with Walmart instead and missed out on Costco. However that proved to be a mistake, as Costco has grossly outperforming Walmart.  This retailer is a winner in a Covid- or no-Covid world and is indifferent to what is going on with the broader economy because everyone loves low prices. And, don’t forget about the two catalysts investors should have their eye on in 2022.

• • One is the potential for a special cash dividend. The timeline lines up because Costco’s balance sheet is flushed with cash and the company has paid out a special dividend four times in the past eight years.

  • Second, we think it may be only a matter of time before management hikes the price of its membership. Historically Costco increases the cost of a membership every five years, and it will be five years next summer. With Costco’s loyalty rates as strong as they are (91.6% renewal rate in the U.S. and Canada, 89% worldwide), Costco can probably increase its membership fee with little resistance. Remember, fee income is pure profit.

What Players Do You Have On Your Team?

In our continued efforts to make our content more reachable, we want to try a fun activity. We encourage investors to think their investment portfolio like a team going into a sport game, in this case let's use soccer. You're the manager of your portfolio. You have to pick players, choose appropriate formation, because you're going to be playing against the stock market in 2022. 

What players do you want on your team? What formation will you play?

We'll leave this here as a teaser for now, and we will let you know our team pick in the coming days.

We hope this will be a fun activity. We'd greatly appreciate any feedback.