How to Sequestration-Proof Your Portfolio
With the automatic spending-cut process known as the "sequester" set to trigger on Friday, investors should avoid buying defense stocks and instead look to play defense, Delphi Management President Scott Black told CNBC on Monday.
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"We lost $110 billion through the payroll-tax hike … that represented 0.7 percent of (gross domestic product)," Black said in a "Squawk Box" interview. The $85 billion payment on the sequester for 2013 would slow economic growth by another half percent, he said. By Black's calculations, that would be a 1.2-percent drag on GDP. That's a big dent: For all of last year, growth was just 1.5 percent. He also expressed concern that consumers already seem to be reining in their spending.
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Against this backdrop, Black advised, "At this point, you'd have to avoid the defense stocks because obviously the across-the-board sequestration is not going to be good for … Lockheed, General Dynamics, or Northrop … You have to avoid them because the earnings power could drop substantially."
Instead, he suggests investors play defense — look at companies that are able to turn-in relatively stable sales and earnings during both economic upturns and downturns. One name he likes is CVS Caremark.
CVS stock "is selling at about 12.9 times expected earnings. They should earn $3.95 to $4 this year. The top-line growth is only 2 percent or 3 percent," Black said, explaining that gross margin dollars, not revenue, is what's important. "There's a shift now from 75 percent of their [prescriptions] to 80 percent are generic," he argued. "They carry less total revenue dollars but higher gross margin dollars."
He added, "The nice thing about CVS is they generate over $4 billion a year in free cash, which was greater than their net income, and they're wed to buy back over $4 billion worth of stock this year."
No disclosure information on Scott Black was immediately available.