Quantifying Risk
October 31, 2026
My 50+ years of investing taught me some valuable lessons. Among the most important are to stay diversified and manage risk. I keep in mind that a 50 percent decline, for example, requires a 100 percent recovery just to break even. Hedging against severe declines, along with analyzing the risk/reward ratios of individual investments, is the secret to superior investment results over the long term, even if the cost of downside hedges means giving up some upside. This is why the Sound Advice portfolio has not only outperformed the S&P 500 and other market indexes for more than 25 years, it has done so with lower risk, as measured by the Sharpe Ratio, a widely accepted method used to quantify risk by comparing the investment return over a period of time to the volatility that investors experienced along the way.
Risk is one of the most elusive factors in investing. Even if considered by many investors, it is not something they usually evaluate. An investment may seem risky or safe, but how do we really know?
In 1966, William F. Sharpe proposed his “reward-to-variability” ratio as part of his work on his capital asset pricing model for which he won the Nobel Prize in economics in 1990. Sharpe’s ratio became useful in analyzing reward-to-risk ratios of investments, and it is now known as the “Sharpe Ratio”.
The returns from various investments can be adjusted for their inherent risk, and then compared to determine which provided the best return for the risk taken.
Risk is quantified by calculating the standard deviation of an asset’s annual investment returns over a period of years. The standard deviation measures disparity of the annual returns from the average. A large standard deviation means reveals a history of high volatility, which means investors were subjected to high risk.
For the Sharpe Ratio calculation, annual deviations are reduced by the risk-free rate available, such as on Treasury bills. The standard deviation is then compared to the average investment return for the entire period, reduced by the average of the annual risk-free rates. For example, if the average annual return for the entire period was 4.5 percent (after subtracting the average risk-free rate) and the standard deviation was 18 percent, the Sharpe Ratio would be 25 percent (4.5/18).
The Sharpe Ratios are shown below for the Sound Advice Model Portfolio and the major market indexes. The time period is from 2000 through 2025. The annual risk-free rates used were the average corresponding rates on Treasury bills for each year. When comparing investments, the one with the highest Sharpe Ratio had the best risk-adjusted return because its average annual return was highest relative to its standard deviation.
Sharpe Ratios
37% Sound Advice Model Portfolio
28% Equal Weight S&P 500
25% S&P 500 Index
24% Dow Jones Industrials
18% Russell 2000 Index
17% NASD Composite
The Sound Advice Model Portfolio had a substantially higher Sharpe Ratio than the major stock market indexes, revealing that it gained more per unit of risk. In other words, it had a substantially better risk-adjusted annual return. In second place was the Equal Weight S&P 500, which is why it is included in our portfolio. At the bottom of the list are the Russell 2000 and the NASD Composite Index, which had the lowest risk-adjusted annual returns.
While prior investment returns cannot be used to predict future returns, the Sharpe Ratio can be used to measure the risk inherent in a particular investment or index, or how well a portfolio manager manages risk. A higher Sharpe Ratio indicates the likelihood of better risk-adjusted investment returns in the future.
The Diffusion Indexes
The Sound Advice Diffusion Indexes (discussed in detail later) identify business cycles and have an accurate track record of predicting major stock market trends over the last 50+ years. They work by observing changes in the most sensitive leading and lagging economic indicators that ultimately lead to significant shifts in interest rates.
During “Aggressive” signals, the S&P 500 climbed an average of 31.5 percent. The market has undergone corrections but has never crashed. Our most recent signal change was in late 2022, when our Diffusion Indexes changed from “Caution” to “Aggressive” which is the current status. That signal was prescient as a new bull market began. The S&P 500 has climbed 93.7 percent since our latest “Aggressive” signal.
All market crashes have occurred during “Caution” signals. When the stock market was not crashing, the S&P 500 either meandered, climbed moderately, or declined in an extended bear market, recording an average decline of 0.6 percent.
This track record is not just a statistical anomaly. It is founded by simple logic. Falling and low interest rates are fuel for bull markets; rising and high interest rates are destructive. If our diffusion Indexes can predict upcoming changes in interest rate trends, they can also predict changes in stock market trends.
Having this perspective has been instrumental in outperforming the S&P 500 during the current century, since the beginning of 2000. Our stock selections have been tailored to benefit from the upcoming economic landscape.
Our next signal will come from our Diffusion Index of Lagging indicators, when the economy is beginning to overheat and exert lasting upward pressure on inflation and short-term interest rates. However, we have not received a “Caution” signal, which reveals that the economy is not overheating. Until we receive a “Caution” signal, we can safely predict that any further interest rate increases will merely be adjustments and not the beginning of a lasting trend that would cause an end to the current bull market. As usual, we still need to be selective with our individual investment selections and be ready to make changes.
The Sound Advice Recommendations
Individual stock recommendations are special situations offering a compelling value proposition. Also recommended are liquid electronically traded funds (ETFs) investing in sectors that are bound to benefit in the months and years ahead. Comments in bold reflect news and comments within the past month. If you click on the ticker symbol, a link will take you to more information. You will also find links to other information and reports. All recommendations, as well as their dividend yields and buy/hold/sell recommendations, are summarized in the table below, sorted by investment objective categories and then in alphabetical order.
We eat our own cooking. The Sound Advice Diversified Growth Fund invests exclusively in the Sound Advice Model Portfolio recommendations. The editor of Sound Advice for 36+ years, Gray Cardiff, manages the Sound Advice Fund and is also an investor on a side-by-side basis with the other investors. The net asset value of the Fund has increased by 36.1 percent so far this year. You can request a prospectus here or later in this issue.
Downside Hedges
Downside hedges are part of the portfolio to reduce risk and dampen volatility by profiting during market corrections. Minimizing losses, even at the expense of limiting the upside, has been our key strategy for outperforming the market over the long run. The suggested hedges below are leveraged, so you only need relatively small investments to hedge your portfolio.
ProShares UltraShort S&P 500 (SDS)
This ETF is designed to produce two times the daily fluctuations of the traditional S&P 500 Index, only in reverse. For example, a decline of say,1.0 percent in the Index will cause SDS to increase by 2.0 percent. Conversely, an increase in the Index will cause SDS to decline by 2.0 percent. SDS is included as a hedge because the S&P 500 Index is distorted and inflated.
The stocks of the Magnificent 7 -- Meta Platforms, Nvidia, Apple, Microsoft, Amazon, Alphabet Class A (Google Class A & C), Tesla, and Broadcom – comprise 36 percent of the S&P 500 Index due to their heavy capitalization weighting, and are perched at an astronomical price/earnings (P/E) ratio of 82.9, based on the trailing 4 quarters of earnings. It should be noted that Tesla’s P/E of 400 counts heavily in the average because it is such a large number. Without Tesla, the average P/E ratio is 25.9, which is still high by historical standards.
Meta Platforms, Nvidia, Microsoft, Amazon, and Google are embroiled in the AI race, and have been transforming from low-debt, high cash flow Wall Street darlings to spenders of billions, financed by large amounts of new debt, and therefore no longer deserving of lofty P/E ratios.
In late October, Meta Platforms included in its third quarter earnings that for the first time that its free cash flow was negative, by $2.12 billion. This news caused the entire S&P 500 to plunge 100 points that day. The earnings report also revealed that it would be creating a new class of nonvoting Class C common stock aimed at maintaining its “founder-led structure” and “provide Meta the ability to finance its growth.”
In the last days of October, Google’s third quarter earnings report disclosed negative free cash flow of $9.07 billion, which fell much further than the $2.70 billion expected by analysts. This was the second consecutive quarter of negative free cash flow. It was also reported that annual capital expenditures are expected to top $200 billion in 2026 and exceed $300 billion in 2027. Borrowing costs rose sharply during the quarter, with long-term debt climbing to $125.1 billion, up from $21.6 billion a year earlier.
While Microsoft maintained positive free cash flow for the third quarter, unlike its fellow hyperscalers, it still declined by 27 percent. Capital expenditures and finance leases were $45.2 billion, up close to 30% from a year earlier. For the first time in nine years, Microsoft is putting together a debt offering, aimed at raising $25 billion.
Amazon reported disappointing third-quarter earnings, despite exceptionally strong growth in its Amazon Web Services (AWS) cloud business. Capital spending of $220 billion is putting pressure on free cash flow, adding to significant investment risk. The central investment question has become whether AWS can generate sufficient incremental cash flow to justify $220 billion in annual capital expenditures.
In 2023, AI partnerships began proliferating, leading to what is now a complicated maze of partnerships among most of the Magnificent 7 and other leading AI companies, including OpenAI, Anthropic, and Advanced Micro Devices, along with many of the 200 so-called “NeoClouds”, new AI start-ups who are madly developing data centers. These companies have invested billions in each other, in return for agreements to provide products or services. The AI industry in now heavily intertwined, with a reliance on the success of all parties involved.
One of the prominent NeoClouds is CoreWeave, whose bonds were trading at par four months ago, were down by 20 percent in October, offering investors a 15 percent annual return. The perceived risk in these bonds has increased substantially, as well as in all of the NeoClouds.
The question is not whether AI will continue to grow and change the world. It most certainly will. The critical concern is whether the rewards will prove to be adequate and whether they will arrive soon enough to support the debt that has been assumed along with the capital expenditures that have been made. The whole inter-connected AI Industry is depending on it.
Another sign that the S&P 500 Index is inflated is revealed from the Sound Advice Risk Indicator (discussed in more detail below), which compares the Index to house prices for 130 years. The latest reading is 3.02, which puts the S&P 500 Index well above the high-risk watermark of 2.0.
The Russell 2000 Index
This index is comprised of small and mid-sized domestic companies which tend to be more volatile than the overall market, especially during market corrections. After the close on Friday, June 26, this index conducted its semi-annual rebalancing. Forty-three companies graduated to the large-cap Russel 1000 because of the increase in their capitalizations (stock price multiplied by the number of outstanding shares). These were the most profitable companies in the Russell 2000. Being added are small cap company stocks primarily focused on healthcare and financial services while combined exposure to technology and industrials declined.
Prior to the rebalancing, 40 percent of the 2000 companies did not have positive earnings. The Russell 2000 is now even more sensitive to macroeconomic conditions with a greater share of small-cap companies and the loss of 43 of the most profitable companies. Now, on trailing twelve-month earnings, more than 40% of Russell 2000 companies are unprofitable. The portion of profitable companies in the index has experienced a steady downward trend over the past three decades. In 1994, only 14 percent were unprofitable.
A common practice in determining the P/E ratio of the Russell 2000 index is to count only the profitable companies and exclude those that are unprofitable. By doing so, as of September 2026, iShares reports a P/E of only 18.3 for IWM, its Russell 2000 ETF. Fidelity explicitly notes that companies with negative earnings do not have a P/E ratio.
This practice is very misleading. A calculation that includes negative earnings recently put the P/E ratio at 37 times twelve-month trailing earnings. MarketWatch described the distinction explicitly: excluding loss-making companies produced a Russell 2000 P/E near 20, while including their losses increased it to about 37.
Of course, a P/E ratio of 37 on volatile small cap companies means the Russell 2000 index is greatly overvalued. It is worth noting that the Russell 2000 has declined by 8.2 percent since mid-August while the S&P 500 is essentially unchanged. The following two ETFs below can also be used as a downside hedge because they short sell the Russell 2000 index. They differ in the leverage employed, which you can choose one according to your investment objectives and risk tolerance.
ProShares UltraShort Russell2000 (TWM)
This ETF is designed to produce two times the daily fluctuations of the Russell 2000 index (IWM). A decline of say,1.0 percent in the Russell 2000 will cause TWM to increase by 2.0 percent. Conversely, an increase in the Russell 2000 will cause TWM to decline in the same fashion.
ProShares UltraShort Pro Russell2000 (SRTY)
This ETF is designed to produce three times the daily fluctuations of the Russell 2000 index.
Equal Weight S&P 500 ETF
Invesco S&P 500 Equal Weight ETF (RSP)
This ETF invests in all the S&P 500 stocks but on an equally weighted basis and rebalances its portfolio each quarter to maintain its equal weights. This preservation of value is behind the superior performance over the traditional S&P 500 Index over the long-term. This ETF is bound to benefit from the broadening out of the bull market.
The Magnificent 7 stocks only represent 2.2 percent of this ETF. In 2025, RSP grew by 9.3 percent. The Magnificent 7 stocks only accounted for 0.7 percentage points of that growth.
From the beginning of 2000, RSP has outperformed all the major indexes, with an annual percentage rate (APR) of 6.99%. This compares to the Dow Jones Industrials with an APR of 5.4%; the Russell 2000 with an APR of 5.1%; the Nasdaq Composite with an APR of 6.4%; as well as the traditional S&P 500 Index with an APR of 6.3%. These returns compare to the APR of 8.9% from the Sound Advice recommendations over the same period.
We can use RSP as a bellwether by comparing it to the S&P 500 as a way of keeping an eye on the breadth of the market. If the evenly-weighted RSP is out-pacing the traditional capitalization-weighted S&P 500, then the breadth is expanding, which is a healthy sign. That had been the case until recently. From mid-August through the end of September, RSP declined 6.6 percent from its peak of 222.77, revealing that the breadth of the market was deteriorating. Breadth improved in October but still weak. This is worth monitoring and a good reason to maintain our downside hedges as discussed earlier.
Special Situations
The following individual stocks are presenting extraordinary values within their respective industries.
Cisco Systems (CSCO)
Cisco is a company in the epicenter of the AI boom. Cisco supplies the backbone of data center networking equipment and software and is a direct beneficiary of the billions of capital spending slated for data centers and AI related equipment. Additionally, Cisco has become a leading supplier of security solutions for the world’s enterprise companies deploying AI into their operations.
In October, Cisco announced new initiatives for its partner to expand its AI business. Through its partnership with NVIDIA, Cisco announced plans to develop next-generation optical connections capable of transmitting 400 gigabits per second per lane. Most importantly, Cisco also reported that after networking orders increased 40% year over year, it expects AI infrastructure revenue to increase from approximately $4 billion in fiscal 2026 (ending September 30) to $7.5 billion in fiscal 2027, an increase of approximately 88%. This progress is worth monitoring.
As the mechanism of AI has moved from human driven bots to machine software driven “Agents”, the perceived cybersecurity risks of launching Agentic AI systems have grown. Cisco’s Live Protect is a new technology aimed at addressing this issue. Live Protect is being developed in collaboration with Anthropic and its technology called Glass Wing, which is designed to find and patch vulnerable areas in infrastructure systems. Live Protect is unique because it offers a shield while patches are being installed.
CSCO has climbed 35.8 percent since the beginning of the year.
Special Situations in Energy
Just after they have climbed substantially as geopolitical events unfolded in Venezuela and Iran, our energy selections were moved from “BUY” to “HOLD” in our April 1 issue of Sound Advice. The rise was so steep that the risk/reward ratio became no longer favorable. At close to the peak prices of these stocks, the April 1 issue projected that energy prices would be falling as events in Iran subsided, and when that happened and our energy selections corrected back to reasonable prices, they would be moved back to “BUY” recommendations. Because of the significant retracements of the stock prices and greatly improved valuations along with much better risk/reward ratios, our energy selections were moved back to “BUY” recommendations in the July 1 issue. Our energy selections have climbed sharply since then with CVX, XOM, And VLO reaching into new high territory.
The International Energy Association (IEA) in its October Oil Market Report concluded that cumulative global observed inventories and strategic reserves were at their lowest levels since at least 2016. However, the report noted that even in the absence of a resolution to the conflicts in the Middle East, an eventual surplus will emerge in 2027. The report also predicted that higher global refinery output will return the gasoline and diesel market to a surplus in the first quarter of 2027. However, this will be insufficient to offset the deficit accumulated during 2026. As a result, supplies will remain tight well into 2027 and is dependent on a recovery of product supply from the Middle East. The takeaway is that supplies will be heading toward normal in 2027, even absent a resolution in the Middle East.
Looking beyond the near term, longer term growth prospects increased significantly since August because the US finalized a joint venture, called North American Blue Energy Partners (NABEP), with Venezuela to rehabilitate the country’s badly deteriorated oil infrastructure. The production target is now explicit: NABEP says it wants to grow from roughly 170,000 barrels/day to more than 1 million barrels/day in the near term, while the wider 17-field arrangement is intended to support Venezuelan output of as much as 1.5 million barrels/day.
As oil-rich parts of the world open up, there will be new sources of demand for the services and resources of US energy companies. Production and revenue is bound to increase even without high energy prices.
Energy providers also stand to benefit from the AI boom in two ways: Power needs from data centers is expected to double by 2030 after decades of stagnant demand in the US, and AI is a promising tool for finding, producing, and servicing natural resources.
Chevron (CVX)
A strong balance sheet with low debt, along with plenty of free cash flow, gives Chevron staying power during adverse conditions with the ability to make timely accretive acquisitions. Future dividend increases are bound to be supported by production growth from assets in the Permian Basin. The acquisition of Hess Corporation (HES) in July 2025 gave the company a 30% share in the Guyana Stabroek block which holds the equivalent of 11 billion barrels with a low production cost. Chevron’s daily production has risen above 4 million barrels.
At the end of October, Chevron reported exceptionally strong third-quarter earnings, driven by higher oil prices, strong cash generation, and especially by historically high refining margins, which increased from $1.14 billion to $4.93 billion.
Another consequential October announcement for long-term profitability was the agreement to transfer its Hess Midstream ownership and some DJ Basin assets in exchange for improved commercial terms and $200 million cash. Chevron expects approximately 50% lower Bakken midstream unit costs and removal of about $3.7 billion of consolidated debt, alongside a $3–$4 billion one-time after-tax accounting loss at closing. Closing is expected by year-end. Its expected cost savings are encouraging, although the large accounting loss will complicate reported earnings in the closing quarter.
Chevron already has an operating infrastructure along with decades of experience in Venezuela. Earlier this year, Chevron expanded its Venezuelan stake which included increasing its interest in the Petro-independencia joint venture to 49 percent. Additionally, Chevron is close to expanding its Petropiar heavy-oil operation which could expand into the neighboring Ayacucho 8 block.
In September, Chevron committed more than $7 billion to Venezuela over five years through its Venezuelan joint ventures and intends to roughly double production to about 600,000 barrels per day. Its Petroindependencia venture will also expand into two adjacent Carabobo areas in the Orinoco Belt. The company plans to fund its entire $7 billion Venezuela expansion using cash generated by its three existing Venezuelan joint ventures, without sending additional cash from Chevron’s parent company into the country.
After soaring to a peak of $211 at the end of March, CVX pulled back to 166 when it was moved back to a “BUY”. CVX has risen 55.8 percent since the beginning of the year.
Exxon Mobil (XOM)
Low production costs and production from its immense Guyana field it shares with Chevron is boosting earnings. Benefits are also appearing from the 2023 acquisition of Pioneer National Resources, evidenced by new production growth in the Permian Basin. XOM also has an attractive dividend yield with a history of dividend increases. The dividend was increased again in 2025 for a solid string of 43 annual dividend increases.
XOM also reported exceptionally strong third-quarter earnings, driven especially by high refining margins, which for the first nine months of 2026 increased to $11.4 billion from $4 billion in the comparable 2025 period. For the 44th consecutive year, XOM increases its quarterly dividend, to $1.07 from $1.03.
Exxon suffered greatly when its Venezuelan properties were nationalized, and management hesitated to plow back into Venezuela. In September, however, Exxon began actively negotiating a return to Venezuela and had previously sent technical teams to evaluate Venezuelan fields.
Earlier this year, Golden Pass LNG, a joint venture between Exxon Mobil and Qatar Energy, launched its inaugural shipment of liquefied natural gas (LNG) to Europe from Texas. Construction on the $10B LNG plant began seven years ago and expects to export 18 million tons a year when it is fully operational.
After shooting to a peak of $170 at the end of March, XOM pulled back to 136 when it was moved back to a “BUY”. XOM is up by 61.5 percent so far this year.
Halliburton (HAL)
As a premier oil field services company, Halliburton benefits from bringing new technology to increasing production of the world’s oil fields. The easiest portion of the oil in the world’s accessible oil reservoirs has been recovered, even in the Middle-East. Now it takes more sophisticated equipment and technology, which is what Halliburton provides. That trend puts HAL on an inexorable growth path.
In October, HAL reported third quarter earnings that exceeded expectations. In the earnings discussion, management said it expects solid growth in Venezuela.
The problem in Venezuela is not finding oil because it has the largest proven oil reserves in the world. The issue is recovering oil economically. After deteriorating from nationalization decades ago, Venezuela’s oil fields desperately need Halliburton’s services.
October third quarter earnings report beat Wall Street expectations, with strong international growth offsetting weakness in North America. Management also issued an encouraging 2027 outlook.
In September, US oil field equipment began moving into Venezuela in meaningful volume. A sustained influx of rigs and workover equipment is normally followed by greater demand for drilling services, completion equipment, artificial lift, well intervention and reservoir work. Halliburton signed its first new Venezuela development agreements with Brazil's Eneva and WESCA to pursue Venezuelan oil-and-gas projects.
Halliburton also has technological innovations that are tailor made for the unconventional reservoirs in the US, including its directional drilling system, the iCruise CX system, which is a rotary steerable tool, and the LOGIX drilling automation platform that makes it possible to reliably drill in curves and laterally in a single run. This new technology has been rapidly deployed in the Permian Basin.
Other relatively new Halliburton technologies include the Zeus platform, electric pumping units, Octiv Auto Frac, and Sensori subsurface measurement. These systems increase efficiency and replace outdated and costly diesel generators as power sources for onsite drilling with generators capable of using natural gas, LNG, and a variety of other fuels that are available on the drilling site.
In Alaska, where some of the nation’s largest oil and gas reserves reside, Halliburton’s EarthStar ultra-deep resistivity tool and reservoir mapping service delivers unmatched performance on the North Slope. Exploring in Alaska was curtailed by the Biden Administration, but that is now expanding under the Trump Administration.
After climbing to a peak of nearly $43 in Mid-May, HAL pulled back to 34 with a dividend yield of 2 percent when it was moved back to a “BUY”. The risk profile is higher than CVX or XOM, but the long-term growth prospects from here are good. HAL has risen by 40 percent since the first of the year.
Valero Energy (VLO)
This premier oil refiner was added to the portfolio several years ago at $60.41 per share. As earnings have grown, VLO is still a good value with a low P/E and attractive dividend yield. Valero makes its money from the “crack spread”, which is the profit margin derived from purchasing crude oil, turning it into refined products such as gasoline and jet fuel, and selling those refined products.
Valero’s third-quarter earnings reported in October were six times its year-earlier earnings, benefiting from extraordinarily strong refining economics higher refining margins.
Valero has the unique ability to refine both light crude oil coming from fracking in the US Permian basin as well as the sticky heavy crude coming from Venezuela. Light crude oil is great for refining into gasoline but not much else. Heavy crude is sought by refiners because it refines into many other products at high profit margins, ranging from diesel fuel to asphalt.
Valero’s ability to refine a variety of crude oil types gives it the ability to achieve discounts for its crude oil feedstocks. This flexibility and access allow Valero to capture the highest margins among its competitors because it can take advantage of the temporary gluts of crude, whether it’s low or high-quality crude or light sweet (low sulfur) or heavy sour (high sulfur) crude, to obtain the best available discounts for its feedstocks. The company’s refineries also have access to the US pipeline network from its gulf coast locations.
Access to Venezuelan crude will benefit VLO as production there increases. Valero has a structural advantage because several of its Gulf Coast refineries are designed to process the heavy, high-sulfur/high-acid crude Venezuela produces. Management said on its latest earnings call that its ability to process very high volumes of Venezuelan heavy crude is a competitive advantage and that it expects Venezuelan processing rates to exceed its historical maximum.
During its October 22 earnings conference call, management confirmed that Valero established a new company record for processing Venezuelan crude during the third quarter, and that increased Venezuelan supplies provide flexibility in selecting lower-cost feedstocks when it trades at substantial discounts to lighter crude grades.
In early September, US Energy Secretary Chris Wright said the administration is considering swapping Venezuelan heavy crude for U.S. light or medium crude that can actually be placed into the Strategic Petroleum Reserve (SPR). Venezuelan crude is generally too heavy and sulfur-rich for direct SPR storage, so the likely mechanism would be to send those barrels to Valero and other sophisticated refiners and receive more suitable U.S. crude in exchange.
Valero’s “green energy” joint venture with Diamond Green Diesel is producing renewable diesel at large profit margins. Renewable diesel is made from animal or plant waste material which reduces greenhouse gas emissions up to 80 percent because it only releases as much carbon dioxide as the material originally contained. Renewable diesel does not congeal at low temperatures which means it can be easily transported through pipelines.
VLO rose to a peak of nearly $262 in Mid-May and did not pull back significantly along with our other selections when it was moved back to a “BUY”. VLO has risen sharply since then, climbing 126.1 percent since the beginning of the year on the prospects of expanding margins from higher prices for gasoline, jet fuel, and other refined products. Even after this year’s increase, VLO still has a very modest P/E of 16.
Special Situations in Healthcare
The healthcare sector has been languishing during the past three years. Returns were close to zero in 2023 and 2024. Some life returned in 2025, but the return for the entire three-year period was far below the rest of the market. As noted in the July 1, 2026, issue of Sound Advice “The Rotation to Healthcare”, the wake of this abandonment left this sector undervalued and replete with investment bargains. Since then, this sector has seen new life, and all of our selections have advanced.
The healthcare sector is bound to benefit from the expanding use of AI. Already, X-rays, CT scans, and MRIs are scanned and analyzed more reliably and accurately. Leading edge dentists are now employing the technology. AI is particularly useful in analyzing large data sets for discovering new treatments and medicines, as well as addressing the sector’s nemesis, cost control, by improving administrative efficiency, patient monitoring, and data management.
In addition to being prime candidates for new AI technologies that are bound to improve efficiency and accelerate growth, healthcare stocks have several traits that make them desirable long-term investments. They are well-suited for an aging population, which exerts disproportionate demands on the healthcare industry. As the world’s population continues to age, this trend is inexorable, making the healthcare sector defensive in nature and more insulated from economic cycles than other sectors.
One of the main criticisms of most healthcare ETFs is that they are dominated by a relatively small number of large companies, such as Johnson & Johnson, which distort the performance of the typical healthcare ETF portfolio.
Invesco’s S&P 500 Equal Weight Healthcare ETF (RSPH)
By investing in the 65 healthcare stocks represented S&P 500 Equal Weight Healthcare Index, this ETF weighs each holding evenly. Both the Index and RSPH are rebalanced quarterly. This approach has given RSPH a superior performance to the large healthcare ETFs. RSPH has risen 22.5 percent since the beginning of the year.
AI’s power in analyzing large data sets is bound to enhance biotech companies’ ability to continue offering explosive profits and the world’s top breakthrough vaccines and treatments. Their stocks are often volatile, making diversification essential. This can be accomplished by investing in a diversified electronically traded fund (ETF) investing exclusively in a portfolio of biotech companies.
ARK Genomic Revolution Multi-Sector (ARKG)
This actively managed biotech ETF investing in companies expected to benefit by incorporating technological and scientific developments, along with advancements stemming from mapping the human genome. Technological breakthroughs in artificial intelligence and other high-tech advancements have cut the cost substantially of opening new opportunities and putting this sector on the cutting edge of many new innovations. ARKG has risen 64.9 percent since the beginning of the year.
Virtus LifeSci Biotech Products (BBP)
This is a passively managed biotech ETF that weighs the portfolio selections essentially equally, as opposed to the more typical practice of weighing selections according to market capitalization. This is an important aspect because biotech ETFs who weigh their portfolio selections essentially equally have been the best performers because they have larger investments in smaller biotechnology companies which have become acquisition targets for large pharmaceutical companies looking for ways to expand. BBP has risen 30.1 percent since the beginning of the year.
Moderna (MRNA)
MRNA has skyrocketed since August 19, on the news of a successful Phase 3 melanoma trial. The combination of Moderna's vaccine with Merck's Keytruda significantly reduced the risk of melanoma returning or spreading compared with Keytruda alone. This was the first successful late-stage trial of an individualized mRNA cancer vaccine and validates Moderna's mRNA oncology platform for other cancers.
Moderna (MRNA) is included in the portfolio because it is the only pure investment play on Messenger RNA (mRNA) technology and this revolutionary technology is on a path to provide solutions for not only vaccines, but for cures and treatments for the most deadly and debilitating diseases haunting humanity.
MRNA started the year at $26 and has risen 753 percent since the beginning of the year.
JP Morgan Chase (JPM)
Considered to be the world’s highest quality banking enterprise with diversified businesses and prudent underwriting policies, JPM is a solid value. Deregulation of the industry will continue to be a substantial benefit to JPM. The Company has a long history of growing dividends. Management says that productivity in operations is improving and that AI programs could be scaled further.
Third quarter earnings reported in October were mixed with strong revenue growth but earnings were below expectations. JPM sold off initially but then recovered. JPM has risen 7.7 percent since the beginning of the year.
QCOM was introduced in our August 19, 2026, post: Qualcomm: It’s a Good Time at $160.19 per share, and indeed, it was a good time to invest. Qualcomm’s stock price had recently dropped 41 percent from its $251 peak at the end of May to $147, after Apple reiterated its intentions to make more of its own chips.
QCOM climbed above $200 but then retraced nearly all of its gains on renewed fears about revenue losses from Apple. Qualcomm will announce fiscal fourth-quarter earnings Wednesday, November 4, after the market closes. Investors will focus on smartphone revenue, automotive growth, semiconductor margins, and AI data center guidance. The sharp retracement of QCOM anticipates a negative report. Because bad news has been anticipated, the release of the earnings report will likely provide another buying opportunity. QCOM is up by 2.9 percent since we added it to the portfolio.
In the last week of October, management announced that it will cut jobs globally in a “performance-focused reduction” following its annual employee reviews, The cuts are part of an effort to build “a stronger performance culture” and address situations where the company “has consistently fallen short of expectations,”
Qualcomm’s greatest prospects come from its “AI Compression” technology which makes AI intelligence models cheaper to run by reducing necessary computing and memory capacity, thereby reducing hardware needs and demand for power. The three main compression approaches are quantization, pruning, and knowledge distillation. Quantization reduces memory needs by changing the format in which data is stored. Using INT4 format instead of FP16 reduces the memory needed by 75 percent. Pruning removes unnecessary parameters that waste computing energy. Distillation teaches smaller “student” AI models to manage less demanding queries.
Qualcomm's strength is power-efficient systems-on-chips (SOCs) containing central and graphic processing units working with neutral processing units (NPUs) which are designed to run AI locally on devices where power consumption, heat, and physical size is critical. Qualcomm supplies its Snapdragon chips to power two-thirds of Samsung’s products. Qualcomm’s AI Compression technology allows large AI models to run on a myriad of small applications and devices, personal computers, tablets, phones, cameras, robots, a vast assortment of industrial equipment, and various components of today’s high-tech automobiles such as autonomous driving. This puts Qualcomm directly in the growth path of the AI boom.
Additionally, recently Qualcomm expanded its AI strategy into data centers, targeting $15 billion of data-center AI infrastructure revenue by 2029. In September, Qualcomm announced a multi-generation collaboration with Amazon/AWS covering customized silicon for large-scale AI inference plus optical-connectivity products.
RLJ Lodging Trust (RLJ)
The annual dividend of 60 cents is well-covered by the company’s cash flow. The net asset value is considerably more than the price of the stock. RLJ has risen 67.2 percent since the beginning of the year, not including the substantial dividends.
RLJ has a large and diversified portfolio of hotel properties, with 96 premium-branded, high-margin, focused-service and compact full-service hotels located in 23 states and Washington DC. This is a low-leveraged REIT because the company’s debt is only 44 percent of its (book value) assets.
RLJ Lodging Trust reported strong earnings in August for its second quarter along with improving fundamentals. Revenue per average room (RevPAR) increased by 6.8 percent from one year ago, which was a reversal from the previous year. Both pricing and occupancy contributed. Management said performance was helped by business travel, strong urban leisure demand and recently renovated and converted hotels, with particularly good results in markets including Austin, Chicago and Tampa.
The portfolio’s net operating income (NOI) for the trailing four quarters increased slightly to $378 million from $365 million. Using a conservatively high cap rate of 7.5 percent produces a portfolio value of $4.96 billion. Adding other assets and subtracting liabilities leaves the company equity of $3.1 billion. After subtracting the liquidation value of the company’s only preferred stock of $328 million leaves equity for the common shareholders of $2.75 billion. Dividing that equity by the 151 million shares of RLJ outstanding translates to a net asset value of $18.18 per share.
RLJ’s $1.95 Series A Cumulative Convertible Preferred (RLJPRA)
This is RLJ’s only preferred stock, with a liquidation preference of $25 per share, which is the maximum value that would be received from an acquisition of the company. Use limit orders on dips below $25.00 to accumulate this preferred stock for a safe annual yield close to 8 percent. The dividends for this preferred only consumed 11.7 percent of the company’s cash income and must be paid before common dividends, making the yield highly secure. The ticker symbol may vary with different brokerage firms.
Sector ETFs
Included in the Sound Advice model portfolio are the following electronically traded funds (ETFs) investing in sectors that are bound to benefit in the months and years ahead from fundamental changes in geopolitical, medical, and economic landscapes. These ETFs contain a portfolio of stocks, much like a mutual fund but, ETFs are liquid and trade like stocks with their own ticker symbols. Their prices are determined by the value of the portfolio of stocks they hold.
Artificial Intelligence:
Global Robotics and Automation Index ETF (ROBO)
Robotics and automation is the key to making the world’s companies more efficient. Approximately half of the portfolio is in robotics technologies, and the other half is in the technology controlling the robots – sensing, computing actuation, and artificial intelligence (AI). This is a diverse way of investing in AI which is the next technological frontier and will be playing an increasingly greater role in the way companies operate around the world. ROBO has risen 9.2 percent since the beginning of the year.
Consumer Staples:
Invesco S&P 500 Equal Weight Consumer Staples ETF (RSPS)
By investing in the consumer staple stocks within the S&P 500 Index, rhe nature of this ETF is defensive in nature and much less vulnerable to periods of soft or negative economic growth. Consumer stables are those unexciting products we use every day without much thought, ranging from food, beverages (including alcohol), household goods (including cleaning supplies), and hygiene products. These are products that people are unable (or unwilling) to remove from their budgets regardless of their financial situation. So far this year, RSPS has declined 6.2 percent after spiking 10 percent in February as the Iran war broke out. The dividend yield is close to 3 precent on this defensive ETF.
Infrastructure and Cap Ex:
Trillions are going into capital expenditures. Hundreds of billions alone are slated this year to build the brains of AI – data centers and the related infrastructure. Outside of the AI boom, trillions are planned for new production facilities in a wide range of industries, from critical minerals and materials to Pharmaceuticals, to move production onto the safe and reliable shores of the US. These ETFs are bound to be primary beneficiaries.
Invesco S&P SmallCap Industrials ETF (PSCI)
Based on the S&P SmallCap 600 Capped Industrials Index, this ETF is designed to measure the overall performance of the securities of US industrial companies with small capitalizations (caps). These domestic companies are engaged in the business of providing domestic industrial products and services, including engineering, heavy machinery, construction, electrical equipment, aerospace, and defense, as well as general manufacturing. They will reflect the positive impacts more strongly than larger companies from an increase in domestic capital spending. Small cap construction companies typically operate inside the US on local construction projects that tend to employ local companies as subcontractors, even when general contractors may be national companies. PSCI has risen 8.1 percent since the beginning of the year.
Invesco S&P 500 Equal Weight Materials ETF (RSPM)
By investing in the companies that comprise the S&P 500 Equal Weight Materials Index, the portfolio of this ETF contains prime examples of basic materials companies outside of the oil and gas industries. Increased capital expenditures will translate into demand for basic materials. RSPM has risen 20.3 percent since the beginning of the year.
