The 3 Types of Stocks to Buy in This Choppy Market

The stock market is off to a wacky and wild start to 2022 – and, amid all the huge rallies and sell-offs, you’re naturally asking yourself: What’s next?

A person holds a phone with a stock chart visible on it with another chart visible on a computer nearby.

Well, I’ll you what’s next: more volatility.

I hate to be the bearer of bad news but the stock market – while on the heels of its best three-year stretch since 1999 –  is facing a Fed that is going to tighten monetary policy for the first time since 2018 and is trading at record-high valuation levels with earnings growth set to meaningfully decelerate this year.

I mean… against that backdrop, how could stocks not struggle?

But the struggles won’t be equal, because not all stocks are equal. In every rough patch for the stock market, there are unique stock market winners that don’t just outperform the market – they actually make you money while everyone else is losing money.

So, I’m here to tell you today about those stocks.

Specifically, amid this market volatility, stocks with three very identifiable features will work. Those features are:

  • Profits. This is the show-me-the-money year. When the market’s flooded with liquidity, investors are fine betting on stories, hopes, and dreams. When that liquidity leaves – as it will in 2022 – investors are only willing to bet on stocks that are executing on those stories, hopes, and dreams. That’s why stocks with real operations and real profits today will likely outperform in the near-term.
  • Relatively low valuations. Year-to-date, high valuation stocks have been crushed, because they are the most sensitive to rising Treasury yields. Stocks with in the highest decile of price-to-sales multiples are down big on the year, while stocks in the lowest decile of price-to-sales multiples are actually up. This pattern will likely persist in the face of Fed policy uncertainty.
  • Cash-heavy balance sheets. When interest rates go up, financing costs go up, and so companies with a lot of debt on their balance sheets see their net profit margins get squeezed and their earnings get chopped. Cash-heavy, debt-free companies don’t face those headwinds. Those stocks will work in 2022.

Basically, over the next few months, it’ll be the money-making, reasonably valued, cash-rich stocks that win on Wall Street.

To be clear, this trading action won’t last forever. We see parallels to 2016. Back then, everyone was freaking out at the prospect of the Fed hiking rates, but when they actually hiked in December 2016 and proceeded to hike eight times into late 2018, the market went back to normal and stocks with the best earnings and sales growth were the biggest winners.

Make no mistake: The best way to make money in the markets over the long run remains to invest in the world’s most innovative companies, making the world’s most valuable products and services, because they’ll benefit from tremendous sales and earnings growth in the long run – and all that growth will power their stocks higher.

But, every once in a while, the stock market undergoes volatile trading periods where the “winners” and “losers” are determined not by earnings growth, but by other factors.

We’re in one of those periods right now. It won’t last forever. But it will last for a few months.

So, what’s the best trading strategy here?

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