MGM Resorts & Darden: Adding More Cyclical Exposure
Secular growth uptrends intact but cyclicals are more timely for new capital – Technology’s ongoing surge has been nothing short of impressive and certainly exceeded my expectations for August, BUT it is the incremental improvement in cyclicals that has my interest for new capital. Why? While growth stocks remain in confirmed uptrends, many appear extended above their uptrends.
Such moves do not mean these stocks are necessarily due for big corrections, but I do view the risk reward more attractive in stocks that are in the early stages of completing bottoming patterns. Cyclicals continue to fit that profile and remain timely contrarian long ideas. As such, the barbell portfolio recommendation of owning secular growth stocks and incrementally adding cyclical growth stocks continues to make sense from a risk management perspective.
Incremental upside break-outs developing for a growing list of cyclicals – In this space last week, I highlighted Visa (V) and Mastercard (MA) as examples of secular growth stocks with a cyclical kicker given both should benefit from improving consumer spending. Of interest technically was that both were emerging from their trading ranges that began on June 8th when most cyclical stocks peaked and began to trade in broad sideways trading ranges through the summer. Both stocks have continued to trend higher while a growing number of other cyclicals are likewise beginning to show evidence of breaking above declining 200-day moving averages or above their June 8 price highs. The bottom line is these price patterns continue to reflect an improving technical backdrop for some of the hardest hit cyclical groups in the industrial, material and consumer discretionary sectors supporting a case to increase portfolio exposure.
Social distancing stocks are beginning to accelerate – Consumer discretionary stocks, notably those depressed by social distancing requirements, such as restaurants, hotels, casinos, resorts and airlines, are timely long ideas to add to portfolios. Tom Lee has highlighted the binary response these stocks are likely to have to any Covid improvement and their technical behavior is now confirming that view.
Similar to MA and V last week, this week’s focus ideas, MGM in the casino group and DRI in restaurants, are in the early stages of accelerating from their June-August consolidations from support bands near rising 50-day moving averages. I view these stocks as timely new long ideas to be included in portfolios.
Bottom line: Growth stocks have been performing well and may continue to do so; however, cyclical stocks appear to have a superior risk/reward profile at this moment. MGM and DRI are two names I encourage investors to take a closer look at as they appear to be breaking out of their consolidation.
Figure: Weekly Sector Review
Source: FSInsight, FactSet
Figure: Best and worst performance sectors over past 3 months
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