What Our Clients Are Talking About Behind The Scenes

This week’s comments are below, which include the questions and issues that were brought up the most often in my institutional client meetings, and I will then follow with my responses

General issues/observations

• Everyone is worried about something.  I do not get a sense of excessive bullishness or complacency at all, which runs counter to what I see in the news headlines and/or from other forecasters.  

• There continues to be a lot of questions and concerns about rising inflation and the increase in interest rates. 

• Valuation is also a popular topic as well. 

• There is a desire to know if portfolios have fully rotated towards the Value/Cyclical trade and I get the sense that more rotating needs to occur. 

• Clients have been more accepting of my favorable Energy views than they were 2-3 months ago, but except for a handful of deep value managers, their exposure has gone from close to zero to 2-3% near benchmark.  Very few have communicated that they have made large overweight bets. 

• I still get a fair amount of pushback on my bullish overall equity market forecast and I get asked a lot about the level of conviction that I have in my views..  Being a contrarian at heart, I find this quite a positive development. 

Specific questions

• Growth managers are a bit shaken and confidence is lower than normal as a result of the recent carnage of the highfliers.  How to play these types of names now?

• After being beaten up for some time and now experiencing some significant performance gains, Value managers are struggling with valuation levels for some of the Cyclicals and asking how much longer can value keep outperforming?  This was a common theme last week as well. 

• What do I do with a stock that is trading above its pre-COVID high and its respective level of earnings is still well below?  Can it still go higher?

• Is the recent uptick in interest rates “the event” you have been looking for and discussed in your outlook publication?  Is there a level of interest rates you are focused on? 

• What are your sector weightings?

• What single stock names stand out right now as actionable and can/should be bought right now?

My Answers

• First, I have been banging the drum about shifting away from secular growth and moving towards Value/Cyclicals/Fins/Energy/Down the cap scale since September/October.  Importantly, my research still strongly suggests that investors should not completely abandon 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 towards Value.

• Second, there are tactical trading opportunities in the names and areas that have been hardest hit.  My more aggressive, shorter-term indicators that weigh price action and other factors more than my usually important earnings revisions flashed extreme negative readings early this last week and are now clearly showing favorable signs.  My work would suggest that any name that was surging to all-time-highs and had a sharp price sell-off that took the stock down to an obvious technical support level (chart support, moving average, Fibonacci retracement level, etc) could be considered for purchase and a recovery bounce, especially if their respective ASM indicators are still favorable. 
  
  In my opinion, what is important for the medium-term health of these types of names will be what happens after the oversold tactical bounces occur.  The bull case for a name – the stock bounces and is able to make a NEW high and its ASM indicator is still favorable.  My work would suggest in this case that the name is still good and has more upside to come.  The bearish case for a name – the stock bounces but FAILS at, or below, its respective recent high AND its ASM shows signs of rolling over and weakening.  In this scenario, the name is likely to struggle going forward. 
  
  So, if you are going to try and tactically trade some beaten up high fliers, you will likely need to be nimble and be on the alert about how the bounce unfolds as it will likely be quite important for its ongoing sustainable health. 
  
  From a medium-term perspective, I continue to favor cyclical growth areas instead of secular – 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 I keep mentioning the most often.  I still continue to highlight DIS as a name that should be a core holding based on my work.

• The discussions with Value managers continue to have different concerns as most have been performing well and still holding up during the selloff, and this has a lot of them worried. Furthermore, they are anxious about valuation levels and how much longer can the style keep working.
  
  I keep reiterating that my work is still signaling additional runway and enough magnitude of performance for investors to still play my favorite Cyclical/Value areas.  My work still points to the conclusion that we are still in only the first third of the outperformance for Cyclicals/Value.
  
  Additionally, I firmly believe that one of the biggest challenges for Value managers is that traditional Cyclical/Value areas might not look as attractive on a valuation basis compared with what investors would ideally like to see.  Critically, I keep stating and warning that it is NOT the time to begin looking in laggard defensive areas that look cheap, like Pharma.  It will come, but you have time.

• I am getting the question about names that are now higher than their pre-COVID price levels despite their earnings being nowhere near recovery let alone also at new high more and more this week.  First, I empathize with investors that have a disciplined approach, and these occurrences can seem irrational, unsettling, or maybe even just dumb.  Second, I am a strategist that does not have the same limitations and the fact is that because I use different, time-tested tools I can make sense out of certain conditions like these more easily.  
  
  Importantly, my work suggests that where we are in the cycle, where policy is, and since my earnings revision work is strong and expected to continue that these types of names will likely keep working and move even higher.  To put it simply, while the earnings revisions momentum continues and policy remains accommodative, tactical pullbacks tend to be opportunities to buy the dips and the duration that this can stay in place is longer than what rigorous logic may suggest. 

• The recent bout of rising rates and inflation anxiety is NOT the event I was looking for to likely lead to a major market top (both long time duration and big price decline).  However, it is a valuable test run and something investors will have to deal with again and again this year until we finally get to the big event that I am trying to identify.  I am more in the camp that the current rise in rates will moderate and possibly see the 10yr yield return below 1.5% in the short term while still expecting the 10yr interest to rise to 1.75-2% by year end.  

• 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.

• Specific names I mentioned the most over the past week that my work suggests can be bought right now:  BA, airlines (UAL, AAL, LUV), cruise lines (CCL, RCL), OXY, GE, VMC, hotels (HLT, MAR), internet travel/tickets (BKNG, EXPE, LYV), banks (WFC, BAC, JPM), IPG, MA, V. 

Now, as we remind in every note, everything mentioned above may not be appropriate for all readers 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.