Sell Alert: Leggett & Platt (LEG)

Dear Reader,

Yesterday, one of our Fortress Portfolio holdings, Legget & Platt (LEG), closed below our 30% hard stop from entry.

So today, per our risk-management rules, we’ll be selling it and removing LEG from our model portfolio.

In today’s alert, I’ll take you through what happened, and what we expect to see in the future…

Unlike some of the previous recommendations we’ve sold, our initial investment thesis with Legett & Platt didn’t break.

Leggett & Platt makes furniture and parts for commercial and industrial uses. Founded in 1883, it has a 52-year dividend growth streak.

That long history of sustaining – and growing – a dividend is one of the main reasons we added it to Fortress when we launched on January 12 this year.

But here’s what happened with the company since then…

Thanks to the Pandemic stimulus bubble, Leggett’s earnings popped 31% in 2021.

The stock soared 160% to a price-to-earnings (P/E) ratio of 25. This is for a dividend blue-chip that has traded at 18 to 19 times earnings for 20 years.

Leggett became 35% overvalued due to the impossible-to-replicate bonanza in furniture buying, triggered by $4 trillion in consumer stimulus checks.

When the boom ended, Leggett faced a significant downturn in earnings. This was created by a perfect storm of soaring interest rates, declining demand as distributors cut back on purchases to clear inventories, and rising costs.

And we expect to see rocky conditions like this continue.

Meaning that even though management has plans to adapt and overcome these challenges – as it has for the past 140 years… Things will likely get worse for Leggett before they get better.

Which is why today, we’ll stick to our strict risk-management practices to preserve our capital before that happens.

Right now, that perfect storm of headwinds I mentioned earlier is continuing to build.

According to our model, there’s a 93% risk of a recession in 2024. That’s based on the best historical recession predictor in history.

And we could see interest rates continue to rise to combat that.

Jamie Dimon, CEO of JPMorgan, says his bank’s worst-case scenario is the Fed hiking rates to 7%. That would send long-term rates soaring as high as 8% or even 9%.

Today, those long-term rates are around 4%. An increase like that would be a doubling of corporate borrowing costs from here. And that’s after they’ve soared 900% since the record lows of the pandemic.

Even though this is one worst-case estimate from one market expert… We want to make sure we’re prepared for it.

These conditions will likely affect most stocks in the market in the coming months, including some of our own holdings.

To protect ourselves, it’s more important now than ever to remove emotion from the equation and stick to our stop losses.

Almost 50% of all stocks in the U.S. suffer permanent catastrophic declines of 70% or more… and never recover.

The first job of any investor is to avoid, whenever possible, such terrible companies.

My motto is safety and quality first… and prudent valuation and sound risk management always.

Risk management protects you against unexpected low-probability events that will inevitably happen over several decades.

That’s why at Fortress, we use 30% hard stops. That means if our portfolio position falls 30% – for whatever reason – we sell it. We would rather be safe than stick around to see whether the thesis has broken and the stock is on its way to far worse carnage.

Using 4.4% position sizing, a 30% hard stop represents a 1.3% permanent capital loss. For context, Fortress Portfolio yields 7.4% today. That means we can recoup this loss with just two months of dividends.

Whether its two months’ worth of dividends or a big win on one of other recommendations… you can see how good risk management is key to avoiding retirement-destroying disasters.

On Monday, October 23, Leggett & Platt closed below $23.82, our 30% hard stop. In compliance with our rock-solid dedication to sound risk management, we’re selling it today and recommend you do the same.

In the next few months, we’ll find a replacement for Leggett. After carefully examining our 500-company database of the world’s best dividend blue-chips, we’ll bring you the best opportunity in safe high-yield investing.

Action to Take: Sell Leggett & Platt (LEG) shares for a 30% loss.

Regards,

Adam GalasChief Analyst, Fortress Portfolio