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Friday, August 25, 2006

Non-Cyclicals

Of the ten sectors currently producing the most alpha, Non-Cyclical (IYK) is, I believe, the only one that I haven’t highlighted yet in its own specific post. A non-cyclical investment, by definition, is not closely correlated to the movement of the markets as a whole, like cyclical investments are. Basically, no matter where the market is headed, people always need certain things such as beverages, soap and food. As such, non-cyclical stocks and funds are excellent sources of alpha and should most certainly be incorporated into both the long-term and actively managed components of your investment portfolio.

One of the difficulties with investing in non-cyclical companies is that the sector is so incredibly broad that investors have a difficult time narrowing down the potential candidates into a reasonable list. Just this morning, as I tried to put a list together of “buy” recommended non-cyclical securities, I had to review my master list three times to make sure I didn’t skip over any.

An easy method to create a workable list of non-cyclical investments is to think about what products you would still buy if you lost your job and then find companies that make those products.

For example, food and beverage companies are, for the most part, resilient to market declines. Currently, I like JM Smucker Co. (SJM) and Corn Products International Inc. (CPO).

If you’re a smoker, odds are you’re not going to quit smoking based on the Dow and S&P. Take a look at Reynolds American Inc. (RAI), UST Inc. (UST) or Altria Group Inc. (MO). I listed RAI in one of my previous posts as a Top Ten Stock in terms of alpha-generating potential.

Think about what other people need on a daily basis. Schools and offices use an incredible amount of paper, and will continue to do so. Companies such as Pope & Talbot Inc. (POP) or Rock-Tenn Co. (RKT) are currently generating alpha.

Perhaps you’d rather own more broad-based exposure to non-cyclicals, which is a great idea for the long-term component of your portfolio. The Vanguard Consumer Staples VIPERs (VDC) and the Consumer Staples Select Sector SPDR (XLP) are two Exchange Traded Funds that are recommended “buys” this morning.

In terms of mutual funds, the Fidelity Select Food and Agriculture (FDFAX), Fidelity Select Paper and Forest Products (FSPFX) funds as well as the Rydex Consumer Products (RYCIX) and the ProFunds Consumer Goods Ultra Sector (CNPIX) funds all provide excellent options.

Non-Cyclical investments are great at all times, and ones which I believe should always be included within an investment portfolio. With little certainty which way the markets will emerge once the heavy hitters return from vacation, now is a great time to adjust your portfolios to roll with the punches. Have a great weekend!

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