More Volatility Ahead

When I wrote my post last week about the potential for a lot of stock market volatility in the month of October, I didn't expect it to happen in the same week.  Of course, one thing missing from my list of investor concerns was the President of the United States contracting COVID and being hospitalized.  Now that's what you call a "Black Swan" event and even though there was some encouraging economic data on Friday and stimulus talks are continuing (although new stimulus legislation is still highly unlikely before the election), the market sold off significantly.  This theme could very well carry into next week with more ups and downs ahead.  Between the President's health status, news of more COVID cases in the mid-west and New York City shutting down again due to COVID, investors will certainly be on edge next week, despite the slowly improving economy and hopes for more stimulus from Congress.  
I still think a short-term bearish and long-term bullish positioning is the best way to profitably navigate this market.  Three long-term plays that I like right now are Nikola (NKLA), Terex (TEX) and DraftKings (DKNG).  

I think the selling in NKLA is overdone right now and the company still has a great business model and very savvy investors behind it.  As long as the OEM partnerships (including GM) and the pre-orders  remain intact, the company still has plenty of potential to succeed in a very large market opportunity to replace diesel long haul trucks with fuel cell / battery electric trucks and launch a new fully electric pickup truck.  Although loss of the CEO Trevor Milton was a shock, I think in the long run it will benefit the company to move away from some of the "noise" and focus on execution of the business plan.    

TEX makes materials handling and high reach equipment and there was a recent article in Barron's about them that is a good read.  They are a relatively cheap, small cap play on the nascent economic recovery for a number of reasons, not the least of which is recovery in basic materials industries (and associated demand for mining equipment) and replacement cycles for high reach equipment used by rental operators and other companies, as well as the Company's good execution through the pandemic period.  

DKNG has been a great stock to own, although I liked it better in the $30's, it has the potential to be a $100 stock.  Their dominant position in the legal sports betting market in the US and potential for more states to open up as a solution to budget woes is the long term driver of their growth.  The restart of professional and college sports has been a tremendous boost to the stock, causing it to more than double from recent lows.  As sports continue to figure out how to navigate the post-COVID world, the opportunity for growth in online gambling will continue.  The company is also one of the only pure plays in online gambling, which is particularly advantageous without the need for physical locations and has certainly helped drive the high valuation unlike many of it's competitors such as Penn National Gaming (PENN).

As for short plays, selling a short-term call credit spread or buying a short-term put on SPY or QQQ will work or also buying a leveraged VIX ETF like UVXY.  Underneath the stock market index declines, select individual stocks (such as cyclicals like industrial / materials companies, banks and even airlines) have been doing well in the past few days, while the broader market, driven by technology stocks has sold off in the midst of the volatility.  This is due to investors continuing to shift from technology to cyclical stocks as the economy recovers and to seek out greater value, which has been a big theme recently.  Technology stocks still present great long term growth potential, but their valuations for the most part have gone up so much since the March lows, that investors are more willing to sell those companies to find better upside (or to simply raise cash if volatility is too high).

Every market provides an opportunity for profit, but the key is to stay informed and do your research.

Of course, you will need to do your own homework and invest where you feel comfortable.  I'm not recommending any particular stock or strategy and full disclosure, I do own / manage positions in the stocks mentioned above.  Stay safe, healthy and positive.  

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.

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