Part 7

How to create Seasonality allocations and portfolios?

Seasonality and economic cycles have obviously been dramatically impacted by the first-ever coordinated global shutdown of economies worldwide. This unprecedented action and associated changes in consumer behavior significantly altered what were once far more predictable consumption activity patterns. However, in some ways, COVID-19 has created its own type of “new seasonality”, and we pay careful attention to the companies that have been made winners in the new environment. We are currently seeing some strong beneficiaries of the viral economy in Tech Hardware, Household Product and Retail, Fertilizers, Homebuilders, Online Retail, and Electronics. We think the strongest players within these sub-industries are very attractive equities to own. From where some of the highest-flying stocks of the year are now, you have to remember to go up 50% would be a Herculean task given all the gains they have had this year. However, given where much of the worst-affected cyclicals are, a rise of 50% would simply bring them back to pre-COVID levels. We think that they will also reach these pre-COVID levels with better profitability and operating leverage than before. Not only that, they have proven that they can survive the worst-case scenario. This greater survivability will inevitably mean more robust valuations, which in our opinion are deserved.

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We think new consumer trends regarding housing, which have remained resilient throughout much of the virus due to changing demand patterns and low rates, and de-urbanization will significantly benefit these sectors. As we always are looking through a multi-faceted lens, we also think that this ‘new seasonality’ as we call it, will also  be accelerated by one of our strategic portfolio trends since millennials are responsible for many of the new home purchases.

PMI Recovery- PMI Above 50       

How to create Seasonality allocations and portfolios?

The Purchasing Managers Index is a simple but reliable indicator of how businesses feel about upcoming periods compared with current ones. If the PMI goes above 50, it indicates that managers in various industries feel more optimistic about their prospects than in the previous month. This often means that companies benefitting from the expansive side of economic cycles will do better than if the number were contracting (or was below 50).  We have done some significant analysis of PMI and its correlations to various sectors comprising the S&P 500. We have looked at the data and determined that since 1949 every time the PMI goes above 50, there is a measurable outperformance by Cyclicals and Value. Even more interesting is a trend that we’ve noticed over the last 25 years that we believe will continue. The three groups that consistently outperform are Technology, Energy, and Value. While we are not constructive on Energy at this time given some idiosyncratic risks we see as unresolved, we are very bullish on Tech and Value due to PMI being above 50 since July. This is the final tactical portfolio trend we use to select our Granny Shots portfolio.

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