Do you think the Lehman collapse was a big deal? Wait until you see what happens if the U.S. defaults on its debts. What was entirely unthinkable previously is now a very real possibility. It’s impossible to know now whether those in Washington will push us over the default cliff, but that scenario plays out , you could see a 20% or more drop in the stock market.
If politicians get their act together and avoid this manufactured crisis, stocks could rally greatly.
It makes for a challenging environment for investors, for sure.
What should you do? At minimum, investors would be wise to cull their portfolios of stocks that are likely to fall irrespective of what transpires in the government shutdown and debt ceiling debate.
Ideally, investors are doing such pruning from time to time on their own. If not, I have a model that is pretty good at identifying stocks to buy and stocks to sell.
Using what I call the P/E Gap – the difference between a stock’s price-to-earnings ratio and its expected growth rate — I can get a good feel for future prospects.
When a stock is richly priced with a high P/E, but a low profit- growth rate, I want to run for the hills. Or, I want to lock in profits when the P/E has simply run too far, outpacing its growth rate.
Here are three such stocks to sell now before the country leaps off the cliff and defaults on its debts: