April 29, 2024

This is a continuation from the first part of a two-part miniseries on bubbles and anti-bubbles.

If we’re in a bubble now, what should you do about it? Acquire anti-bubble assets.

Back in July 2021, buying energy stocks was an excellent anti-bubble strategy. Since then, the Energy Select Sector SPDR Fund (XLE) gained about 86.0% while the S&P 500 rose roughly 18.0% and the Nasdaq Composite Index jumped around 10.0%. In that case, the anti-bubble defense worked.

The prescription is simple: sell inflated assets to avoid bubbles and buy anti-bubble assets. The architect of this strategy, portfolio manager Diego Parrilla, thinks three anti-bubble assets stand out today.

The first is biotechnology stocks. This is a highly speculative sector often doomed by higher interest rates. Biotech peaked in early 2021 and was destroyed in 2022. But today, many biotech stocks trade at low valuations.

Several good biotech stocks’ valuations are roughly equivalent to the net cash on their balance sheets (often referred to by valuation pundits as a “net net”). In other words, they’re worth basically what they have in cash.

Another anti-bubble asset to consider is natural gas. Rick Rule of Rule Investment Media said natural gas and natural gas stocks are “stupidly cheap” right now. Natural gas has fallen about 82.0% from its August 2022 peak:

Clearly natural gas is a highly volatile commodity. Still, Rule indicated the ratio of oil to natural gas is at its second-highest level over the past 20 years.

The third anti-bubble asset is gold stocks (not gold itself). These equities have dramatically underperformed gold over the past couple years.

One example is Newmont Corporation (NEM), a large gold mining company whose stock has fallen about 56.0% since March 2022 when the Federal Reserve started raising interest rates. Portfolio management company Sprott Asset Management indicates the sentiment in this space has never been lower.

So, if you believe we’re in a bubble, consider acquiring anti-bubble assets. Many experts point to biotech, natural gas, and gold stocks as attractive possibilities.

Disclaimer: The assets and asset classes mentioned in this post are for illustrative purposes only. Dan White does not personally own any of the assets mentioned in this post. Similarly, Dan White & Associates does not own any of the assets mentioned in this post on behalf of clients.