Global stock markets crashed and burned last week after the U.K. voted to leave the European Union, and it is not without reason to expect further losses over the next few days and weeks. Already the situation has become fluid with evidence of potential backtracking and softening of the rhetoric, but it is still early in the process and volatility will likely remain high for a while as events unfold.  The only thing that is certain is that sound portfolio and risk management should get us through this period whether things go further south or they stabilize sooner rather than later. 

In the most recent installment of my biweekly Technical Nuggets column I warned readers to be vigilant, and suggested adding a portfolio hedging strategy in last week’s BTP Weekly.   So far, caution has paid off but I’m ready to roll with the market, and things could change rapidly.  While you can debate the political pros and cons of the Brexit dynamic, what really matters from a long term financial point of view is risk management through an actionable plan that reduces the potentially negative consequences to your money that stem from what may or may not happen in the next few days, weeks, and months.  Here are some steps to take.

Manage Risk and Reduce Losses

The first goal in portfolio management is to reduce potential losses while preserving the portfolio’s overall value. To be sure, it takes some work, but the results can be well worth it.  When you manage risk through a periodic hedging strategy, you diversify your portfolio by the use of instruments which rise in price as other prices fall.  

Last week, I wrote about the ProShares Ultrashort Biotech ETF (BIS), a useful tool in the type of market we are living in at the moment for hedging a biotech heavy portfolio.  I recommended BIS shares on June 10^th and the position is already profitable as the Nasdaq Biotech Index has taken a tumble with the rest of the stock market over the last two weeks.  BIS moves in the opposite direction of the Nasdaq Biotech Index (NBI) at 2x the rate of the index and offers a way to bet against the entire biotech sector.   BIS rose nearly 10% on Friday, delivering a sound measure of portfolio protection. In comparison the S & P 500 lost 3.7% and the Nasdaq 100 Index lost 4.07%.  NBI lost 4.96% on the day.  See below for full details of our current BIS recommendation.

Sell Clear Losers

Once you have managed your overall portfolio’s risk by focusing on the overall value and using simple hedging techniques, you can move on to making decisions about individual stocks contained therein in a more thoughtful and systematic manner.  First, I examine the big picture.  The Brexit vote is a big red flag for multinational companies whose European operations are going to have to deal with major uncertainty, such as changes in laws, regulations and currency fluctuations as a result of the vote.  Investors will see these stocks as very vulnerable for a while and we really don’t want to be around them until they stabilize. 

Next, I looked at each position in the portfolio and asked how the Brexit would affect them. I found two stocks in our portfolio that are likely to face some headwinds due to Brexit related issues, Amgen (NSDQ: AMGN) and Biorad (NSDQ: BIO), so I recommend their immediate sale.  Amgen is especially vulnerable, being a member of the Nasdaq 100 Index, the weakest index in the U.S. market at the moment.  To be sure, investors sell what they can during market meltdowns and Amgen is a liquid stock.  But beyond that fact, Amgen is facing a great deal of uncertainty after the Brexit, as investors will have to start pricing in changes in any existing deals that the company is currently involved in as well as potential disruptions in future drug approvals and in the company’s ability to continue with ongoing clinical trials.   

Biorad is vulnerable because it is a specialist in the diagnostics field. And although it offers very specific laboratory testing equipment, testing products and reagents to hospitals and other health care facilities the Brexit could interrupt the flow of business for Biorad as facilities may cut back on upgrades or cancel orders for back up equipment due to budgetary uncertainties.  

Use Weakness to Add to Long Term Positions with Excellent Prospects

On Friday’s Flash Alert I recommended using the current market’s weakness to add to positions of Ambarella (NDSQ: AMBA), Whitewave Foods (NSDQ: WWAV) and Cerus Corp. (NDSQ: CERS).  You don’t have to rush into these companies right away, as their prices may drop further in the near term.  But their longer term prospects are still sound and short term weakness will give you an opportunity to buy shares at lower prices based on your individual risk tolerance and your long term portfolio goals.  I used Friday’s weakness to add shares to my positions in these three stocks. 

Ambarella (NSDQ:  AMBA) – This company makes high speed, high resolution chips used in cameras and drones especially for security purposes.   Every time there is a terrorist attack or an “unexpected” geopolitical event, a little light will go off in someone’s head to buy this drone or that security camera. 

Whitewave Foods (NSDQ: WWAV).  When times get hard people still have to buy food. And Whitewave remains at the forefront of the food trend for health conscious people. Its Silk almond milk and its Horizon organic dairy line are likely to continue to sell well.  And the company continues to roll out new products and expand through acquisitions.

Cerus Corp. (NSDAQ: CERS).  This company continues to slowly move toward what I think will be a blockbuster FDA approval for its Intercept blood microbe neutralizing system to be used for red blood cell transfusions.  It’s already a leader in plasma and platelet transfusion microbe neutralization and the U.S. government recently allocated $30 million dollars of a possible $140 million dollar grant to the company to further test Intercept in red blood cells. 

BTP Special Situation Trading Alert

Buy the ProShares Ultra Short Biotech ETF (BIS) up to $43.  Recommended on 6/10/16 at $39.14; closing price on 6/24/2016 was $44.68. Apply a trailing 7% sell stop.  Dr. Duarte owns shares in BIS.

Portfolio Summary

This Week’s Changes:

Sell Amgen (AMGN) – Bought 2/1/16 at 152.75. Closed below Sell Stop of $146.45 on 6/24/16.

Sell Biorad Laboratories (BIO) – Bought 5/16/15 at $146.25.  Traded below Sell Stop of $138 on 6/24/16.