Will He Be Right Again?

He's 2-for-2 in predicting market crashes. And he's confident that he's about to be 3-for-3.

Bob Rodriguez, the CEO of First Pacific Advisors, isn't your stereotypical doom-and-gloom money manager. That might be why his forecasts have proved so prescient. It's certainly why his stock fund, FPA Capital, posted annualized returns of 15% during his tenure, according to Lipper -- and why he's been labeled everything from a "prophet" to the "mutual fund manager with the best record in the past quarter-century."

He just made another prediction
Rodriguez's first bold call came during the dot-com craze of the late 1990s. Calling it "speculation masquerading in the costume of investment," he sold off his technology holdings.

The move cost him some investors, but he knew he was right. When the market finally fell, his fund was ready to pounce and managed to return a positive 29%, while the S&P 500 lost 38% between 2000 and 2002.

Again in the mid-2000s, he began noticing problems in the mortgage market. He sold most of the portfolio, bringing it 40% into cash, with the rest invested in energy stocks.

Just as before, investors began to flee the fund. However, he was once again positioned for the rebound, and in 2009 his fund outperformed the S&P 500 by 27 percentage points.

Today he's at it again
According to a recent article in Fortune by Mina Kimes, Rodriguez is now publicly criticizing the current state of the United States' finances. He believes that the U.S. debt-to-GDP ratio, reported to be 64%, truthfully sits above 500%, when factoring in entitlements such as Medicare and debt assumed from Fannie Mae and Freddie Mac.

It's just a matter of time, he says, before investors start to realize this and then refuse to buy Treasuries. When they do, interest rates will soar, and the pain will spread "across the financial system."

And when that happens, we're back to where we were several years ago -- only worse, because the government won't be able to bail anyone out.

The key takeaways
Rodriguez says that all hope is not lost. If the government is capable of ending partisan debates and focusing on reducing the federal deficit, the situation will get better. However, a smart investor should nevertheless be prepared. So how you should you invest?

First, take heed from how Rodriguez made it through the last financial crisis. He focused on energy stocks and companies with strong balance sheets. After all, even though energy companies took a hit during the last recession, they've rebounded nicely and continued paying dividends during the downturn. And companies with minimal or no debt can more quickly adapt to changing circumstances.

Here are some companies that fit that bill. Most of them are relatively cheap.

Company

Primary Industry

Market Cap

P/E Ratio

Total Debt

HudBay Minerals (NYSE: HBM  ) Metals and Mining $2.4 billion 25.0 $0
Oceaneering International (NYSE: OII  ) Oil and Gas Equipment and Services $4.0 billion 19.3 $0
Dolby Laboratories (NYSE: DLB  ) Electronic Components $4.9 billion 16.7 $0
Paychex (Nasdaq: PAYX  ) Data Processing and Outsourced Services $10.6 billion 20.9 $0
Apple (Nasdaq: AAPL  ) Computer and Consumer Hardware $302.1 billion 15.3 $0

Data from Capital IQ, a Division of Standard & Poor's.

Or you can take it a step further
Another way to profit from another market pullback is to buy put options on the S&P 500 index.

These options contracts gain in value if the market declines. When this happens, you can cash out your options contract and use the profits you made to buy stocks at depressed prices -- perhaps even the five companies I highlighted.

You could also sell put options on other large-cap companies whose stocks would be likely to fall during another downturn. Financials would probably get hit first, but, as with the last pullback, it's not always clear which financials will emerge unscathed, so I'd be hesitant to dabble in options on those companies.

Instead, you might look to consumer staples or consumer discretionary companies. Their stocks wouldn't be immune to a downturn, but if they offer essential consumer needs -- along the lines of broad-based, diversified retailer Wal-Mart (NYSE: WMT  ) or a global food giant Kraft (NYSE: KFT  ) -- their businesses would offer some resiliency.  

If you're interested in more ways to use options in your portfolio right now -- whether you're a beginner or an advanced trader, and whether you're simply seeking additional income or looking to profit from another downturn -- I invite you to take a look at a special video series and trading guide just compiled by options experts Jeff Fischer and Jim Gillies.

For a limited time, you can see all the details of their thinking in an exclusive video series that many investors have paid nearly $1,000 for. Simply drop your email address in the box below for more information.  

Adam J. Wiederman owns no shares of the companies mentioned above. The Motley Fool owns shares of Wal-Mart Stores and Apple. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Paychex, Dolby Laboratories, and Apple, as well as creating a bull call spread position in Apple and a diagonal call position in Wal-Mart Stores. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 16, 2011, at 5:12 PM, CrankyTexan wrote:

    Great, Mr. Wiederman. Scare investors into buying a product.

    I used to like Fool.com at lot more than I do now.

  • Report this Comment On June 17, 2011, at 1:47 AM, millsbob wrote:

    "You could also sell put options on other large-cap companies whose stocks would be likely to fall during another downturn."

    this makes no sense. why would you write puts on something you expect to fall?!?!? you might Buy them, but your sentence is a recipe for throwing money away.

    i think someone needs to review options basics.

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