What are Granny Shots?
FS Insight currently has six key investment strategies (3 tactical + 3 thematic). The Granny Shots portfolio contains stocks that appear in at least two of the themes. As a result, this portfolio is designed to capture value from the multiple tailwinds expected in the investment strategies.
The word Granny Shots has nothing to do with grandmothers or with retirement portfolios and originates from the basketball world. It is used to describe an unorthodox way to make a free throw shot with an underhand throw, like your granny might, hence “granny shot.” The most famous player who employed the “granny style” of free throw shots was Rick Barry, the great NBA Hall of Famer. He was renowned for using this unconventional free-throw style, achieving a free throw conversion rate of 90% in a career spanning many years, among the very best in history. The average free throw rate in the NBA was below 80% in 2019.
We believe the Granny Shot stocks represent the “best of the best” of our strategies. We recommend our clients overweight these stocks just as Rick Barry threw the ball in the unorthodox granny style. Stocks that appear in multiple investment strategies could benefit from multiple tailwinds and have a higher chance of beating the market.
What themes are involved in choosing Granny Shots stocks?
As noted, the Granny Shots portfolio contains stocks that appear in at least two of these six investment strategies, three tactical and three longer term. The tactical approaches are expected to capture exposure to the investment themes we favor for the next six to 12 months, while the longer term strategies are designed to capture the exposure for three to five years.
It looks to create outperformance using market rotation in the short term.
Besides the traditional Growth vs. Value pair, we break down the stock market into two more dimensions:
Defensive vs. Cyclical and Quality vs. Non-Quality
Currently, we favor:
- Growth-Cyclical and Growth Quality styles in the next six months (Dec. 2019 to Jun. 2020)
It's another tactic in which we overweight those industries that demonstrate strong seasonality over the next six-month period.
These industries historically have tended to outperform the broader market compared to other industries in the period in question.
Currently, we are overweighting the following:
- Real Estate Services
- Oil & Gas Equipment
- Oil & Gas Refiners
- Semiconductors Equipment
- Managed Healthcare
- Industrial Machinery
- Online Retailer
- Home Entertainment
It was introduced in the December 2019 rebalance, replacing the "FANG in Odd Year" strategy because 2020 is an "even" year. When we published the strategy in December 2019, ISM PMI was still below the critical level of 50. However, we have noted several times since the Summer of 2019 that the PMI would be bottoming in 3Q-4Q and would recover back above 50 in early 2020.
Admittedly, the coronavirus global pandemic caused the PMI to tank again right after the January rebound. But as 2020 unfolds and as the pandemic starts to fade away, the PMI should start to recover again. And the PMI recovery theme would make sense. If you look at those sectors in PMI recovery, most of them are “epicenter” sectors.
Consequently, the following recommendations have tended to outperform in a PMI recovery environment, historically:
The Millennial Strategy
It is based on the demographic fact that the Millennials are about to enter their prime income age (30-48), given the average age for Millennials is currently 29.
As they get older, we will see them begin to form families, have children, buy homes and make many other purchases involved in setting up a new household.
They will also begin to prepare for retirement through financial investments.
Millennials are one of the largest cohorts in US history, hence this should be one of the most important exposures that investors need to capture in the next 10-15 years.
According to the statistics and projections from the United Nations, the world entered a labor shortage after 2018.
We estimate the world will be short 78 million workers by the year 2028.
Indeed, almost all major economies are now short of workers.
Japan entered a labor shortage in the late 1990s, while Europe and the U.S. entered their own in 2013 and 2014, respectively.
China, as the world’s major factory, saw a labor shortage beginning in 2016.
One of the solutions to this issue will be greater AI (artificial intelligence), automation, and use of robotics. In our AI/Automation strategy, we not only recognize the supplier/manufacturer of AI and automation products, but we also identify companies whose operations could benefit from adopting the new technologies.
It is designed to give investors exposure to our expectation of rising long-term rates of inflation. In such an environment, we recommend overweighting stocks of "asset heavy" and "higher leverage" companies, while underweighting "labor intensive" firms.
Our methodology suggests that:
- assets in general should appreciate with higher inflation, benefitting asset heavy companies more than others;
- higher inflation should increase revenue. This means that, given most companies use FIFO (First In, First Out) inventory accounting, the cost of goods sold (COGS) will tend to be flat, so margins should improve more for the asset-intensive companies compared to those of more labor-intensive (asset-light) companies.
- The higher interest rates that could result from rising inflation could also reduce the pension obligations and debt leverage for these "higher Leverage" companies.
- Rising inflation likely will be also accompanied by increased labor costs, which, again, should directly hit more labor-intensive companies.