Santa left investors with the biggest lump of coal imaginable this year: a bear market in what was the worst Christmas Eve ever for the stock market.
It’s Christmas time, a time of joy! You should be enjoying the company of family and enjoying your time off, not fretting over steep paper losses in your portfolio caused by the words of Fed chair Jay Powell. Many investors were eagerly awaiting Santa Claus to leave the gift of gains under the tree, but instead, they got clobbered as Mr. Market (or should we say Mr. Grinch?) showed his cruel side, ruining Christmas for all but the most contrarian of investors who’ve kept their powder dry.
Now, you’ve probably heard the word “depression” floating around in the headlines of late. The U.S. markets have clocked in the worst December since the Great Depression, and while you could certainly follow the herd and sell all your equities, so you can enjoy what’s left of the holiday season, you should know that smart investors like David Tepper (who’ve gotten very rich from market crashes) have already begun nibbling at this damaged market in spite of the extreme negative momentum.
Stocks are the most out of favour they’ve been since 2008, or heck, even the Great Depression, but it’s times like these, as others ditch their stocks like a cheap suit, when investors like you and me are made or broken. You don’t even need to spot the biggest bargain, as they’re now abundant. What you do need, however, is a long-term time horizon, patience, and the discipline to not lose your cool when others around you already have.
If you’ve got the right tools, all you need to do is scoop up boring defensive stocks like Hydro One (TSX:H) and collect the dividends while you wait for the dust to inevitably settle over the next several months. You see, nobody goes for a low-growth utility because they seek massive upside potential. They flock to it for downside protection, and fair, potentially above-average returns over the long term.
Of all TSX stocks out there, Hydro One looks to have a huge margin of safety, with the stock hovering around in limbo for the entire year. The 4.7% dividend yield is now less attractive given the trajectory of interest rates, but if you consider the possibility of a recession, interest rates could be on their way back to zero, and all of a sudden, highly regulated utilities, even the lowest-growth ones, will become great again through the eyes of investors.
Although the low single-digit top-line growth is unattractive to hungry investors, you need to remember that Hydro One has a virtual monopoly in the Ontario market. This monopoly has been a source of backlash, but nevertheless, it means highly predictable cash flows that’ll be flowing in, even if we fall into a depression!
At the time of writing, Hydro One stock trades at a 14.5 forward P/E, a 1.2 P/B, and a 2.0 P/S — pretty darn cheap for a guaranteed perpetuity whose annual payment will be on the uptrend! And because higher interest rates are already a given at this juncture, a contracting economy and implied rate cut will make Hydro One’s 4.7% yield that much more attractive.
Simply put, Hydro One is a must-have hedge if you’re serious about protecting your capital from a severe economic downturn.
Stay hungry. Stay Foolish.
Fool contributor Joey Frenette has no position in any of the stocks mentioned.