What Our Clients Are Talking About Behind The Scenes

Every week I do over twenty idea conference calls with institutional clients from all over the world.  They range from tactical traders to strategic long only portfolio managers.  I literally speak and interact with the best and the brightest that the money management profession has to offer, and it is one of the aspects of my job that I love the most. 

During these discussions, the clients are always interested in what my research is showing and what my views are on a host of different topics.  Importantly, however, I do not just present to my clients where they passively listen to my conclusions and best ideas.  The time spent is usually more of an active discussion and debate where investors are also sharing with me things they are thinking, worried about, what they own, and what they are thinking about buying and selling. 

Sometimes clients agree with my views and at others there is significant pushback.  Because I have so much client engagement, the aggregation of the meetings can provide valuable information back to me about where the dominant thoughts and positioning of the institutional investing crowd are at that moment. 

I remember back when I was in graduate school and just a regular retail investor.  I would wonder what it would be like to get a glimpse into what that “pros” were doing and thinking.  Well, going forward, I intend to share on Tuesdays what the professional investors that I speak with are thinking and doing with their portfolios to give our FSI subscribers a peak behind the so-called institutional curtain to help our retail clients.  

I hope that you enjoy our new weekly note and would love to hear from you if you are finding it useful in your investment returns.  So, below is my first comment and within it you may see some terminology that might be unknow or confusing to you.  Over time, FSI will be creating a glossary of terms/vocabulary areas and some teach in sections, but for now they are still a work in progress. 

Over the past week, the bullet points below are the questions and issues that were brought up the most and I will then follow with my responses.

1. Growth managers are concerned, confused, and wondering if Growth is done or should they be buying this dip? 
2. Conversely, Value managers are struggling somewhat with the valuation levels for some of the Cyclicals and asking how much longer can value keep outperforming?
3. Everyone asking about our take on the recent volatility in both the equity market and the rising in interest rates. 
4. What are your sector weightings?
5. Single stock contrarian names that were mentioned a lot.

My answers

1. I have been warning and discussing moving away from away from Growth and more towards Value since September/October.  With that being said, I continue to state “I am NOT completely abandoning Growth” because their earnings revisions are still solid.  Thus, it is not that my work dislikes Growth but more that it relatively is more favorable about Value. 
   
   I continue to suggest that Growth managers look into more cyclical growth areas – HC Equipment, Semi Equip, Semi Chips, Data Processing (MA, VA) Tech Hardware (STX, WDC), Electronic Equip & Instruments, Electronic Components, Electronic Manufacturing, Tech Distributors, Internet Travel/Entertainment (BKNG, EXPE, LYV), and Hotels to name some of the areas he mentioned the most often.  I continue to highlight DIS as a name that should be a core holding based on my work. 
   
   As the week progressed and the market sell off continued, the discussions shifted somewhat.  I commented that the size of sell offs in some of the highfliers that my earnings work still likes have been so large that I would consider buying the dips in some of them if the price damage was extreme. 
   
   
2. The discussions with Value manager had a much different tone as most have been performing well and still holding up during the selloff.  Despite this, they are worried about valuation levels as well as how much longer can the style keep working. 
   
   I have commented that my work is still signaling additional runway and enough magnitude of performance for investors to still play my favorite Cyclical/Value areas.  On Friday, I was asked in what inning I thought the outperformance of Cyclicals/Value was in and to my client’s surprise I said “bottom of the 2^nd” (i.e. still quite early). 
   
   I continue to state the one of the biggest challenges for Value managers is that traditional Cyclical/Value areas might not look as attractive on a valuation basis.  Importantly, I have been warning NOT to begin looking in laggard defensive areas that look cheap, like Pharma, and that the time will come for this types of stocks but not now. 
   
   
3. I have been stating that the move up in bond yields and the shift of investors concerns towards rising inflation, commodity super cycles, and stagflation are quite over done at this point in time.  I have made some macro comments about the bond market acting more mechanically and artificially, and that we are likely within 1-5 days for things settling down, which should also help the equity markets, which would likely be bullish for equities and a move back to the old highs and beyond.  
   
4. Full above benchmark in Financials (recently upgraded for the 3x), Industrials, Materials with Energy (recently upgraded for the 3x), CD, and Tech at tilt above. 
   
   My below benchmark sectors are Health Care, Staples, Utes, and Real Estate.
   
   
5. Contrarian:  HAL, SLB, OXY, DVN, EOG, FANG, HFC, CF, WRK, BA, GE, MMM, all airlines, casinos, cruise lines, hotels, travel related internet, banks, BAX, BDX, BSX

Now everything mentioned may not appropriate for every reader to implement, so please think about your goals, objectives, and risk reward parameters before jumping into action.  With that being said, my goal is to help provide additional thoughts about the equity markets and to further help you navigate the investing waters to maximize your portfolio returns.