Part 6

How to allocate and create Tactical Portfolios?

Our Tactical Portfolios are also an important tool we use to manage a bit more actively. We generally construct these with a 6 to 12 month time horizon in mind. We have three tactical portfolios consisting of our Style Tilt between Value and Growth, our Seasonality Measure, and our PMI Recovery Above/Below 50. We’ll discuss our thinking on each of these briefly.

How to allocate and create Tactical Portfolios?

Based on many of our proprietary indicators, we see a golden age of Value dawning. While we still like many growth stocks, we do not believe these champions of the COVID-19 era will lead the averages to new and impressive highs. We believe pure value plays and value cyclicals will lead this move to new ATHs. We think that the market has rediscovered valuation risk in the wake of coronavirus. We recommend getting exposure to pure value stocks and value cyclicals, especially to take advantage of this changing dynamic. We believe that as the strength of the virus diminishes that much of the wall of money that has gone into the big tech stocks over the last 9 months will rapidly and violently shift to these two groups of stocks. 

Many people tend to forget what is in the present value of a stock. Most equity analysts and economists use discounting future cash flows to arrive at the stock’s current value. What this means is that although current and near-term quarters should be weighted more than subsequent quarters because the cash-flow from these periods is more certain that even for a stock with a lower P/E ratio the future quarters are so many that they constitute a larger portion of present value than many investors realize. For example, if a stock has P/E ratio of 15 times earnings, then you should be discounting 60 quarters of future growth, and even though this quarter and next quarter might have severely depressed, or uncertain, results as a result of the virus, the following 58 likely will not. Obviously, the better the financial condition, balance sheet and management of the company the truer this is. In March, the market panic created many opportunities and beat down a lot of stocks that are undeniably undervalued by key fundamental metrics, particularly when incorporating discounted cash-flow analysis and proven survivability. We also like to follow the activity in adjacent markets like those for derivatives and debt to get a sense where the equities are going; developments in these areas are largely supportive of our portfolio theses.

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