- Recommended Stock Ideas
This list was published in the FIRST WORD dated April 9, 2020. We’ve republished it here in order to highlight it for our valued subscribers. STRATEGY: Updating Epicenter Trifecta List – 24 stock ideas are removed, and 11 stock ideas are added to the list… Now 108 stocks in the Trifecta list… We are re-balancing our “Trifecta” epicenter stock list. These are the stocks which were hit the hardest by the pandemic and have the greatest operating leverage to a re-opening. And we like the earnings upside in these stocks, because of the massive cost reset. The stocks are based on positive views coming from the trifecta of: (i) Quant (tireless Ken), (ii) Global Portfolio Strategy (Brian Rauscher, aka Rocky) and (iii) Technicals. 11 Additions:Consumer Discretionary:$AAP, $AZO, $BBY, $GPC, $HOG, $PHMIndustrials:$GGGReal Estate:$ARE, $ESS, $O, $PSA 24 Deletions:Consumer Discretionary:$DRI, $SBUX, $TOLFinancials:$BOH, $FHN, $FITB, $GS, $PBCT, $PNFP, $RF, $SBNY, $STL, $SYFIndustrials:$EMR, $LSTR, $NVT, $TTC, $UNPMaterials$ESI, $LYB, $MLM, $MOSReal Estate:$RYN, $VNO Below is the complete list of 108 Epicenter Trifecta list (*)… CLICK HERE for a full copy in PDF format Consumer Discretionary:$AAP, $AN, $AZO, $F, $GM, $HOG, $BBY, $GRMN, $GPC, $LEG, $TPX, $PHM, $NWL, $MAT, $PII, $RL, $MGM, $HLT, $MAR, $NCLH, $RCL, $WH, $TNL, $SIX, $FL, $GPS, $KSS, $LB, $VFCFinancials:$WTFC, $ASB, $FNB, $PB, $TFC, $WBS, $PACW, $NYCB, $MTG, $EVR, $IBKR, $VIRT, $BK, $STT, $BHFIndustrials:$AGCO, $OC, $ACM, $WAB, $GNRC, $CSL, $GE, $GGG, $IEX, $PNR, $CFX, $DOV, $MIDD, $SNA, $XYL, $FLS, $EAF, $ITT, $ALK, $DAL, $JBLU, $LUV, $MIC, $KEX, $JBHT, $R, $UBER, $UHAL, $MANEnergy:$XOM, $HP, $BKR, $HAL, $NOV, $SLB, $COP, $EOG, $FANG, $HES, $MRO, $MUR, $PXD, $XEC, $HFC, $MPC, $PSXMaterials:$EXP, $CF, $NEU, $NUE, $RS, $SON, $IPReal Estate:$ARE, $BXP, $HIW, $JBGS, $ESS, $UDR, $KIM, $NNN, $O, $WRI, $PSA Source: FSInsight, Bloomberg (*) Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.
- First Word
COVID-19 UPDATE: Israel cases 39 yesterday vs 1,200 in January. Obliterated. 4 new structural factors in 2021 impact equities. Focus on stocks benefitting from structural tailwinds and capacity to positively surprise -- Epicenter in 2021.
Click HERE to access the FSInsight COVID-19 Daily Chartbook. We are shifting to a 4-day a week publication schedule: MondayTuesdayWednesdaySKIP THURSDAYFriday STRATEGY: Focus on stocks benefitting from structural tailwinds and capacity to positively surprise -- Epicenter in 2021 I got my first dose of the COVID-19 vaccine today. I am a resident of the state of CT and the eligibility includes adults age >45, which I qualify. I am sharing my experience, because registering, determining eligibility and getting a vaccine appointment was all seamless and smooth. - the entire process from determining eligibility to registering to vaccination took less than 48 hours. - Yup. 2 days only. Not kidding.- super impressiveAfter googling CT vaccine eligibility (3/24/2021 first date I became eligible), I was directed to the CDC's VAMS (vaccine administration management system) portal. I entered my name, details, etc., and healthcare insurance NOT required (optional). next morning, I received this email. It was an automated email and once I went to the website, another email was generated sending me a one-time passcode. Boom. Once on that side, I entered my zip code and did a ring search for vaccines, and set the distance to 50 miles (I wanted to get it ASAP). And a pop-up clinic had appointments for the next day. That particular clinic offered the Moderna vaccine.- next morning, I made the 35 mile drive- the pop-up is a large warehouse, with US National Guard administering- it was a pretty fast process (some paperwork). And once I got my shot, I was asked to hang out for 15 minutes and even scheduled my second dose (28 days later). And I received my vaccine card -- there is an electronic version as well. Overall, I would rate this as pretty seamless. Israel cases rolled over at 26% of pop vaccinated... COVID-19 essentially obliterated. Daily cases now 39 vs 1,200 in JanuaryAs our data has consistently shown, CT is among the top US states in terms of vaccine penetration (see Point #2) with 30% of the state's population receiving at least 1-dose. Israel's case figures began to rollover once the nation reached 26% of population receiving at least 1 dose. Take a look below:- Israel cases rolled over at 26% vaccine penetration- Now at 60%, cases are in full retreatDaily cases are now obliterated in Israel. From a peak of 1,200 cases in January (right before 26% penetration reached) to 39 per day yesterday.- COVID-19 has been obliterated in Israel. This is the key takeaway for me. The US is vaccinating ~2.5 million Americans everyday and soon the network effect (penetration) of dosing will confer some type of herd immunity to the regional area. In fact, the US case trends very sharply vs Europe and Latin America. - recall, both Europe and Latin America are far behind the US in vaccine delivery In fact, according to Bloomberg data, the UK has dosed 43% of the population with 1-dose. - no single major European nation is even 10%- the US reached 26% overallIf Israel is a template, US cases are set to rollover in a sustained way soon. Source: BloombergSTRATEGY: Rolling corrections = diminished odds of a broader index correction... Equities experienced a rocky few weeks, and it sure feels like a rolling correction. In fact, because of this recent suite of rolling corrections, we believe the prospects for a larger correction in 1H2021 have largely diminished:- Technology + Growth corrected 15% Feb-March- Energy stocks correct 13% in past two weeks- Russell 2000 fell 10% in the past two weeksThere it is. Pretty much, the entire stock market saw a 10% correction, but at different points YTD. Source: Bloomberg ... Turmoil in part due to markets dealing with 4 new structural factors in 2021... So far in 2021, stocks have been very challenging, and notably, leadership has changed sharply compared to 2020. Energy is the best performing sector YTD +29% while Technology, last year's leader is down 1%. While multiple factors are at work, including positioning (Growth + Tech are overowned), 4 structural factors have contributed to the challenges:1. Long-term interest rates are beginning to rise, the first real rise (non-Fed) since before 1980s, really2. Inflation expectations are rising, with 5-yr inflation breakevens making one of its fastest ever ascents3. 2021 Washington is talking about raising taxes, and a seemingly less pro-capitalist agenda vs 2020 White House4. US economy is re-opening and we are now in a post-war recovery period, not pandemic shutdownEach of these individual factors would be difficult for a fund manager to discount. But 2021, these 4 are happening simultaneously. Moreover, the first two factors have not been part of the investment playbook for a generation, so it is natural for markets to be uncertain. Source: BloombergSTRATEGY: Buy stocks benefitting from structural tailwinds and the capacity to positively surprise... hint, EpicenterThe structural tailwinds above describe a very different environment compared to 2020. In 2020, the structural factors were falling inflation, falling rates, economy in tatters and de-regulation efforts by White House.- 2020 vs 2021 are completely different playbooks- 2021 winners, therefore, should be completely different than 2020- make sense? So here is a simple checklist: Tech/ Epicenter/ Energy/ Growth Cyclicals CommodityBenefit fromHigher rates Nope Yes YesInflation Mixed Yes Yes! YES!! Re-opening Eh Yes! YES!! Yes! YES!! CapacityPositive surprise Eh Yes Yes! YES!! So as you can see, Energy is really the sector facing the best tailwinds in 2021. Recall, Goldman Sachs and other commodity research teams forecast oil to rally +30% by Summer. This will translate into higher FCF and higher equity prices for Energy sector broadly (ETF-XLE), and oilfield services (ETF-OIH). Conversely... these 2020 winners might have a hard time positively surprising the StreetMichael Batnick, Director of Research of Ritholz Wealth Management, and writer of a blog called Irrelevant Investor. Blog post here. These are the stocks that might have a somewhat harder time becoming darlings again -- Source: Michael Batnick and Lot's of market congestion was cleared up last week... even as the S&P 500 remains overboughtWe have found clients incrementally concerned about a potential larger drawdown in markets. Equities are extended and overbought, so there is simply the heightened risk that some pullback could happen. But at the same time, catalysts exist creating a favorable risk/reward, even this week. Catalysts/ Drivers:- 1Q2021 EPS season --> surprise higher positive guides- Vaccine penetration expansion = improving safety across USA- VIX falling, even as rates rising- VIX falls below 20, maybe below 15- NASDAQ showing relative strength, 66% of S&P 500- Fiscal relief is being delivered to Americans and this is added liquidity STRATEGY: 25 Power Epicenter Trifecta stock ideas(*)We are introducing a Power Epicenter Trifecta stock list. This is designed to identify the strongest stocks within our Trifecta epicenter stock list. We essentially added a power rating to the stocks in the trifecta list to find stocks with the strongest price appreciation potential. Thus, the criteria for the Power Epicenter Trifecta is: Positive views (i) Quant (tireless Ken), (ii) Global Portfolio Strategy (Brian Rauscher, aka Rocky) and (iii) Technicals. Plus strong power rating: (i) trailing 1M return > 12M return (ii) outperformed S&P 500 past 6M(iii) price > 20D MAVG(iv) price > 50D MAVG Consumer Discretionary:RL, NCLH, RCLFinancials:PBCT, NYCBIndustrials:NVT, DAL, KEXEnergy:XOM, HP, NOV, SLB, COP, EOG, MRO, MUR, HFC, PSXReal Estate:BXP, HIW, UDR, KIM, WRI, VNO, JBGS (*) the 25 Power Epicenter Trifecta stock ideas are the subset of the original 121 Epicenter Trifecta stock list. For the full list of our original Epicenter Trifecta stock list, please click the link below. Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile. For the full list of the 121 Epicenter Trifecta stock ideas, please Click Here. ADDENDUM: We are attaching the stock lists for our 3 portfolios:We get several requests to give the updated list for our stock portfolios. We are including the links here: - Granny Shots --> core stocks, based on 6 thematic/tactical portfolios- Trifecta epicenter --> based on the convergence of Quant (tireless Ken), Rauscher (Global strategy), Technicals- Violence in USA --> companies that are involved in some aspect of home or personal security. We are not recommending these stocks, but rather, bringing these stocks to your attention. Granny Shots:Full stock list here --> Click hereTickers: AAPL, CSCO, INTC, MXIM, NVDA, EBAY, KLAC, GRMN, GOOG, MNST, MSFT, AMZN, QCOM, TSLA, PYPL, AXP, BF/B, PM, XLNX, TGT, PG, XOM, VLO, GL, RF, ATVI, BBY, GE, AMAT, LRCX, MU, HPQ Trifecta Epicenter (*):Full stock list here --> Click hereTickers: AN, GM, F, GRMN, LEG, TPX, TOL, NWL, MAT, PII, RL, MGM, HLT, MAR, NCLH, RCL, WH, TNL, SIX, DRI, SBUX, FL, GPS, KSS, LB, VFC, FITB, WTFC, ASB, BOH, FHN, FNB, PB, PBCT, RF, STL, TFC, WBS, PNFP, PACW, SBNY, NYCB, MTG, EVR, GS, IBKR, VIRT, BK, STT, SYF, BHF, AGCO, OC, ACM, WAB, EMR, GNRC, NVT, CSL, GE, IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, EAF, TTC, ITT, ALK, DAL, JBLU, LUV, MIC, KEX, UNP, JBHT, R, UBER, UHAL, LSTR, MAN, XOM, HP, BKR, HAL, NOV, SLB, COP, EOG, FANG, HES, MRO, MUR, PXD, XEC, HFC, MPC, PSX, LYB, EXP, MLM, CF, MOS, ESI, NEU, NUE, RS, SON, IP, BXP, HIW, UDR, KIM, NNN, WRI, VNO, JBGS, RYN Violence in USA:Full stock list here --> Click here (*) Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile. POINT 1: Daily COVID-19 cases 60,429, +1,250 vs 7D ago... 7D delta in daily cases has been flat over the past 12 days..._____________________________Current Trends -- COVID-19 cases: - Daily cases 60,429 vs 59,179 7D ago, up +1,250- 7D positivity rate 4.7% vs 4.4% 7D ago- Hospitalized patients 35,437 down -1.5% vs 7D ago- Daily deaths 980, down -8.3% vs 7D ago_____________________________- The latest COVID-19 daily cases came in at 60,429, up +1,250 vs 7D ago. - The decline in daily cases has been paused - 7D delta in daily cases has been flat over the past 12 days... Source: Fundstrat and state health departments7D Delta flatlined over the past 9days... The decline in daily cases seems to be paused. Daily cases have been flat over the past 12 days. Source: Fundstrat and state health departments US hospitalization still rolling over ... and even US deaths seem to be rolling over... Below we show the aggregate patients who are currently hospitalized due to COVID. It has fallen significantly from the wave 3 peak. Source: Fundstrat and state health departments Source: Fundstrat and state health departmentsMichigan has the largest 7D delta in daily cases (+2,595). Excluding Michigan, the 7D delta in daily cases would be negative. Source: Fundstrat and state health departments Source: Fundstrat and state health departments POINT 2: VACCINE: 38 states (+2 from Tuesday) near ~60% infected + vaccinated and one fourth of American received at least one-dose of vaccines..._____________________________Current Trends -- Vaccinations: Vaccinations ramping steadily- avg 2.5 million this past week vs 2.5 million last week- overall, 14.2% fully vaccinated, 26.1% 1-dose+ received_____________________________Vaccination frontier update --> 38 states now near or above 60% combined penetration (vaccines + infections)Below we sorted the states by the combined penetration (vaccinations + infections). As we commented in the past, the key figure is the combined value >60%, which is presumably near herd immunity. That is, the combined value of infections + vaccinations as % population > 60%.- Currently, 38 states (see below) are basically all at this level- SD, ND and RI are now above 80% combined penetration (vaccines + infections)- So slowly, the US is getting to that threshold of presumable herd immunity Source: CDC and FundstratCollectively, these 38 states represent about 72.5% of the US population. So while it is now more than half of the states, it is a slightly smaller share of the population. But still, as the chart below highlights, the US is seeing steady forward progress and this figure continues to rise steadily. Source: CDC and FundstratThere was a total of 2,820,280 doses administered on Thursday, slightly up from 7D ago. The pace overall is steadily rising, as evidenced by the 7D moving average (see blue line). Source: CDC and Fundstrat ~73% of the US has seen 1-dose penetration >25%... still not wide geographyTo better illustrate the actual footprint of the US vaccination effort, we have a time series showing the percent of the US with at least 10%/15%/20% of its residents fully vaccinated, displayed as the orange line on the chart. Currently, almost all US states have seen 10% of their residents fully vaccinated. However, when looking at the percentage of the US with at least 15% of its residents fully vaccinated, this figure is only 24.5%. And only 2 states (NM, AK) have seen 20% of their residents fully vaccinated - 0.9% of US population.- While almost all US states have seen vaccine penetration >20%, 73.2% of them have seen 1 dose penetration >25% and only 5.2% of them have seen 1 dose penetration > 30%.- All of the US has at least 10% of its residents fully vaccinated, However, only 24.5% of US has fully vaccinated >15%- This is still a small figure (10%/15% of residents fully vaccinated) but this figure is rising sharply now. This figure could rise even more rapidly after the JNJ's 1-dose vaccines roll out. Source: CDC and Fundstrat This is the state by state data below, showing information for states with one dose and for those with two doses. Source: CDC and Fundstrat The ratio of vaccinations/ daily confirmed cases is generally trending higher (red line is 7D moving avg) and this is the most encouraging statistic. - the 7D moving average is about ~50 for the past few days- this means 50 vaccines dosed for every 1 confirmed caseThis figure is rising nicely and likely surges in the coming weeks Source: CD and FundstratIn total, about 82 million Americans have received at least 1 dose of a vaccine. This is a good pace and as we noted previously, implies 30% of the population by April. Source: CDC and FundstratPOINT 3:Tracking un-restricted and restriction-lifted statesWe are changing Point #3 to focus primarily on tracking the lifting of restrictions, as states begin to ease various mandates. Keep in mind, easing/lifting restrictions can take multiple forms:- easing indoor capacity- opening theaters, gyms, salons, saloons- eliminating capacity restrictions- eliminating mask mandatesSo there is a spectrum of approaches. Our team is listing 3 tiers of states and these are shown below. - states that eased in 2020: AK, OK, MO, FL, TN- states that eased start 2021 to now: SD, ND, NB, ID, MT, IA, NC, MS, SC, AZ, TX, MD- states that announced future easing dates: GA, NY, WI, AR, CA, AL, CTGROUP 1: States that eased restrictions in 2020... The daily case trends in these states is impressive and it is difficult to say that lifting restrictions has actually caused a new wave of cases. Rather, the case trends in these states look like other states. GROUP 2: States that eased restrictions in 2021 to now... Similar to the list of states above, the daily case trends in these states are impressive and it is difficult to say that lifting restrictions has actually caused a new wave of cases. - we have previously written about how ND and SD, in particular, have seen an utter obliteration of COVID-19 cases in those states- that seems to be a function of vaccine penetration + infection penetration, leading to something akin to herd immunity GROUP 3: States that announced plans ease restrictions in 2021... These states have upcoming dates to ease restrictions. The dates are indicated on each chart. The cases trends in these states have been mostly positive, with perhaps the exception of NY state:- NY state case levels seem awfully stubborn at these high levels- weather is improving in NY area, so if weather has any effect on virus transmission, it should slow cases
- Earnings Daily
FSInsight 4Q20 Daily Earnings Update – 02/05/2021
CLICK HERE for a copy of this report in PDF format.• 110 companies are reporting this week.• Of the 268 companies that have reported so far (54% of the S&P 500), 79% are beating earnings estimates by a median of 12%.• On the top line, 76% are beating by an average of 7%.
- Recommended Stock Ideas
Epicenter – Stocks with Uncommon Value During Uncommon Times
This list was published in the Daily BLAST dated December 11, 2020. We’ve republished it here in order highlight it for our valued subscribers. Updated Epicenter Trifecta list — adding 19 stocks and deleting 1 stockWe have updated our Trifecta Epicenter stock list. These are the stocks which were hit the hardest by the pandemic and have the greatest operating leverage to a re-opening. And we like the earnings upside in these stocks, because of the massive cost reset. The stocks are based on positive views coming from the trifecta of: (i) Quant (tireless Ken), (ii) Global Portfolio Strategy (Brian Rauscher, aka Rocky) and (iii) Technicals (Rob Sluymer). – The total Epicenter list is growing, now >100, but adding cyclicals make sense– FYI, this is culled from the Russell 1000– We also added a new field ‘% of Buy ratings’ on the stock– the fewer the % of Buys, in our view, the more contrarian the idea– There are many stocks with <20% of ratings that are ‘Buy”-rated Additions to the Epicenter Trifecta Stock List: 19 stockConsumer Discretionary:MATFinancials:FHN, RF, TFC, AGNC, EVR, VIRT, STTIndustrials:GNRC, MIC, KEX, R, UHALEnergy:XECBasic Materials: EXP, ESIReal Estate:UDR, JBGS, RYNDeletion to the Epicenter Trifecta Stock List: 1 stockConsumer Discretionary: BWA Source: Fundstrat, Bloomberg
- Your Weekly Roadmap
Stocks Approach Old Highs But Close A Whisker Lower
Is a stock market breakout near? I asked this question in the previous issue. Well, the Standard & Poor’s 500 index did brush up against an all-time intra-day high Friday but there wasn’t enough momentum to finish the job. Early on it reached 3,027.39 just shy of the intraday high of 3,027.98, and closed around 3023, again a hair’s breadth from the old record, 3,026. For the year it’s up over 20%. Yet if investors seem a bit more jittery now than even a few weeks ago, it isn’t the news. We are still waiting for some final resolution to the U.S. -China trade negotiations and Brexit, well, who knows about Brexit. The Federal Reserve should indeed cut rates next week. (For more on this see page 6.) Ostensibly, there’s optimism that some kind of a trade deal—any deal—will agreed be agreed to by the U.S. and China. That’s likely to be resolved in mid-November when President Donald Trump meets with China’s leader Xi Jinping. Meanwhile, the ups and downs of Brexit—will John Bull or won’t he leave the European Union—seem to have faded, for the moment. And apart from the constant doom and gloom headlines, if investors seem cautious it is partly because right about this time twelve months ago is right when stocks began their descent into an unexpected and rapid waterfall bear market drop that hit bottom— 2,351 on the SPX—on Christmas Eve, 2018. The scars have not healed, and more on this can be found on page 8. For one thing, third quarter earnings reports from Corporate America are coming in less bad than expected—in general. The FactSet data at the end of this report notes a marked improvement. And that’s to the good. The market’s responding. But what I find most interesting as a possibly indicative sentiment signal is that where the results were relatively poor for some bellwether names—such as was the case for Caterpillar (CAT) and Amazon (AMZN) last week—the stocks went up in the case of the former, and remained stable for the latter. Indeed, CAT’s stock jumped about 6% last week even though CAT lowered its earnings outlook for the year and posted lower third-quarter sales. This kind of action would not seem to suggest that the future is bleak. Instead, that stock looks washed out at this point and looking for an excuse to go up. The market might be too. In the next few weeks, we should see some purchasing manager index reports that could render an affirmative or not to our house position that there will be yearend rally in stocks. Tom Lee offers his strong viewpoint on this, beginning page 3. In the way of data, the University of Michigan issued the final results Friday of its October consumer sentiment survey, showing that Americans’ feelings about the economy declined slightly. Earlier in the month retail sales figures showed that consumers pulled back on spending in September. Separately, September U.S. durable goods orders—products designed to last at least three years—decreased 1.1% from the previous month, due mainly to declines in the transportation sector, with orders for auto vehicles and parts falling 1.6% and orders for commercial aircraft declining 11.8%. That’s courtesy of the General Motors (GM) strike and Boeing’s (BA) ongoing problems with its MAX aircraft. Third quarter earnings reports keep rolling in. As of Friday, FactSet says 40% of the companies in the S&P 500 index have reported results. The blended (actual plus estimated results for companies yet to report) earnings decline for the third quarter is 3.7%. That happens to be better than expected -4.8% expected last week. Positive surprises from companies in multiple sectors (led by technology) were responsible for the improvement—that is, less negative—in 3Q EPS expectations. Five sectors are reporting year-over-year growth in earnings, led by the utilities and real estate. Six are reporting a year-over-year decline in profits, led by the energy, materials, and tech. Analysts see slight earnings growth in Q4, followed by mid-to-high singledigit earnings growth for Q1 and Q2 of 2020, according to FactSet. And in one of the more interesting and unusual new stocks, given a year of mostly poor IPOs, CNBC reported that Richard Branson’s space tourism company, Virgin Galactic, will list directly on the New York Stock Exchange Monday. Shares will trade under the ticker symbol SPCE. Virgin Galactic’s spacecraft can carry six passengers and two pilots to the edge of space. Only capitalism can do this, folks. Quote of the Week: From CNBC. com: Virgin Galactic’s spacecraft is dropped from a jetpowered aircraft and fires a rocket motor, reaching over three times the speed of sound as it climbs though Earth’s atmosphere. The spacecraft and its passengers then float weightless for a few minutes, before gliding back down to land on Earth much like a traditional aircraft. A ticket goes for about $250,000 per person, and the company has a list of 603 customers waiting to fly. Questions? Contact Vito J. Racanelli at vito. racanelli@fsinsight. com or 212 293 7137. Or go to
- Your Weekly Roadmap
A Reversal of Fortune: Value, Small Caps Stocks Catch a Bid
A funny thing happened in the U.S. stock market last week. I don’t want to get Biblical on you but it seems—for a while anyway—the last were first and the first were last. I don’t know if the violent sector, market cap and style rotation seen last week will last, but there could be some larger and longer significance to these changes. I’ll get to that in moment. Not only did the U.S. stock market have a good week, up roughly 1%, but it was what went up for a change that matters potentially: the orphans, stocks that nobody wanted. The Standard & Poor’s 500 index closed at 3007. US Treasuries were crushed last week, down nearly 6%. Ouch. Monday saw Mr. Market turn on a dime and embrace things that in some cases haven’t been performing for a very long time. First, Value stocks. Remember those? No? Underperformers for the last decade. Well, they jumped, finishing up about 2.6% last week while growth stocks, everybody’s everything, fell slightly. Momentum and tech stocks didn’t do so well, either. Second, small caps, an underperformer this year, did the Cinderella thing and caught a bid. The Russell 2000 index of small caps rose some 5%. Indeed, according to data from Bespoke Investment Group, from Monday to Wednesday small-cap growth outperformed large-cap growth by an amount that topped 99.1% of prior occurrences. Most extreme was the small-cap value relative to large-cap growth, the second largest 3-day move since the financial crisis and one of the largest moves since the data for these two series since 1995. What arose surprisingly was that assets that nobody wanted before Monday are suddenly valuable. Will it last and what does this mean? Frankly, I’m not 100% certain but I still look for the bull market to rally on through the end of the year, as noted in these pages week after week. One week doesn’t necessarily make a trend. But there are two ways to look at this violent change in investor attitude. The glass-is-half-empty folks, otherwise known as the bears, claim investor are buying value stocks and small caps because they have less to fall in a bear market, since they’ve done so poorly. Me? I remain a half-full guy. I think investors are beginning to wise up to the idea that the Federal Reserve Board is going to keep cutting rates, perhaps not as quickly as President Donald Trump wants but still good enough for stocks and profits. (For more see page 6.) And last week the European Central Bank cut its key deposit rate and said it would begin €20 billion ($22billion) a month of asset purchases, or quantitative easing, starting Nov. 1. The U.S. and China will again begin talks to try to end or mitigate the ongoing trade war. There were a couple of tension easing moves last week, too. Investors are buying value stocks because they are the cheapest and stand to gain the most in a new leg of the rally. Same goes for small caps. And cyclicals outperformed the defensives last week. For more on this see page 3. Bespoke also had another interesting stat. The SPX has been stuck around 3000 for 12 months, even as it hit new highs. A bad sign? Bespoke notes that SPX’s 52-week 200-day moving average has been stuck inside a 3% band for just the seventh time in the index’s history. In the six prior periods, forward returns were pretty consistently to the upside. One year later, for example, the S&P 500 had an average gain of 16.0% (median: 20.2%) with gains 83% of the time. Over the next two years, the S&P 500 saw an average gain of 28.2% (median: 23.9%) with positive returns in all five periods. These periods of consolidation look more like pauses to refresh than a prelude to a rollover, says Bespoke. Here’s an interesting tidbit from Kent Engelke, chief economic strategist, Capitol Securities: Value has greatly lagged growth/momentum for at least 10 years and August was the worst month for value in at least 20 years. Value/small cap is synonymous to active management. Momentum is synonymous to passive management. It is a well know axiom on Wall Street that once everyone is doing the same thing, a significant transition could be immediately at hand, Engelke wrote. Perhaps the correct question to ask is will this week be significant, perhaps viewed as the high-level mark of passive investing. Only time will answer this question, he adds. Quote of the Week: Bloomberg reported that Morningstar data shows passive assets under management rose to $4.27 trillion, moving ahead of the $4.246 trillion managed by active managers. Historic. Looking Questions? Contact Vito J. Racanelli at vito. racanelli@fsinsight. com or 212 293 7137. Or go to
- Tom Lee's Equity Strategy
Data Says S&P 500 Index Set Up for A Monster 2H19 Rally
Writing about what might happen in the market’s future isn’t without risk. Nobody gives you a magical crystal ball when you become a strategist. But here’s the thing. There are signals—based on empirical data—that, when interpreted properly, give investors a useable roadmap to what the future will likely hold for stocks, for example. We’re all about the data. I’m going to give you five of them here which together point to a gain of about 12% over the next six months for equities. I believe investors should be more aggressive buyers right now and here’s why, followed by some 15 “asset light” stock ideas. The S&P 500 index fell a breathtaking 7% in the 4 days following the July 31 FOMC meeting and the plunge in the US 10-year note yield to below 1.70%. Indeed, it triggered a global market sell-off (panic?). For more on this, see page 6. As they always do after such big moves down, the doom prophets emerged from their bear caves, some pointing to 2019 as approaching its own “Lehman moment.” The plunge in US bond rates is certainly not welcome (sign of disinflation, and even credibility issues for Fed); the 10-yr was 1.32% in 2016 after the surprise Brexit vote, so this is not ‘new ground.’ However, investors ignore at their own peril the following five bullish signs that were generated in the past week. These signals have dependably generated an average gain of 12% in the following six months, 3.3 times above the 3.6% average gain over 90 years seen in the rolling average of any six months. Source: FS Insight, Bloomberg Here’s why I’m bullish: 1. Fed made its first rate cut in July, and since 1971 such a move, when leading indicators are positive, as they are now, resulted in an average 14.4% gain; (See chart.) 2. The VIX term structure (1 month-4 months) inverted. The last five of seven times was the bottom, followed by a mean six months gain of 8.9%; 3. A 3% one-day drop is sign of panic. Since 2009, there followed a mean 15.3% gain in the next six months; 4. The daily relative strength index (RSI) fell below 30. Six of the last six instances saw the market gain sharply, with average six months gain of 11.1%; 5. The American Association of Individual Investors (AAII) measure of the percentage of bulls less bears is about -26. Since 1987, when it has been that negative, the market followed up with a mean 9.3% gain in the next six months. So maybe this is our crystal ball. Source: FS Insight, Bloomberg We are not ignoring the negative signal of a plunge in interest rates, nor saying that a full-blown trade war is negative for the world. But we believe the trifecta of strong US corporates; a positive White House (towards business) and a dovish Fed are major supports for U.S. equities. Moreover, whether investors are convinced of it or not, 2019 is tracking 2009 closely (something I’ve been saying since the start of this year). My view remains that 2009 is the best analog for 2019 and that equities are seeing their best year since before 2006. The larger question remains: why does the Street seem to view every 5% pullback as the start of Armageddon? This old bull market has endured multiple 5%-10% drawdowns and managed new highs—yet, investors seem to believe this expansion’s structure is built on straw (though, actually, it makes sense if one sees this as purely central bank driven). What could go wrong? There are so many things that could go wrong. Deflation. A badly managed Brexit. Trump and China go to threat level 10. The Democrats surge in the polls. Russia interferes in the next election. North Korea. Deutsche Bank. Too many. Bottom line: I believe that investors need to stick with the four winning strategies I have pointed out: (i) US over RoW; (ii) “asset light” over “asset heavy”; (iii) Large-cap over small, (iv) and cyclicals. The following 15 stocks tickers represent the top decile of “asset light” + Doctor Quant Model ranked 1, and 11 underweights which are “asset heavy” and DQM ranked 5. OW tickers are: ROK, VRSN, LRCX, MXIM, QCOM, XLNX, MSFT, CL, MNST, MO, PM, AMGN, BIIB, GILD, BMY UW tickers are: WAB, CRM, WDC, ICE, CB, L, STI, HCP, WELL, NI, AP Figure: Comparative matrix of risk/reward drivers in 2019 Per FS insight Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500 ** Performance is calculated since strategy introduction, 1/10/2019
- Your Weekly Roadmap
Stocks Slide; 2Q EPS Season Begins; NFLX Stung
I regret to inform you that the market only made one new high last week, Monday, and then actually slid slowly and quietly down from there. How so you might ask? Well, it’s been a very good June and first half of July, and, frankly, everyone needs a break from all the festivities. Volumes were low as many market participants are presumably on break, probably somewhere less suffocating than New York City. Investors moved to a modified “risk off” stance last week after hitting another all- time high on Monday While a quiet week until the very end, it was punctuated with some minor excitement caused not by earnings nor by macroeconomic data. No, it was a reaction to comments Thursday from a policymaker of the Federal Reserve Board. OK. No surprise. The culprit this time was New York Fed President John Williams, who said central banks must take swift action when faced with adverse economic conditions. That was immediately and happily interpreted by markets as meaning a 0.5% rate cut is coming at the end of July from the Fed instead of a 0.25%. (For more on this see page 6.) The market slips from highs for a few days and just like that the cavalry, I mean the Federal Reserve Board, comes to the rescue. However, the central bank later walked that back and said Williams didn’t intend to signal any specific policy changes. I think this underpins the growing difficulty the Fed has created for itself in terms of communications. In the long run, I’m not sure how salutary it is for markets to hang on the word of every single Fed policymaker. I think maybe I should just retitle this newsletter to the “Vito’s Central Bank Watch.” The Standard & Poor’s 500 index fell 1.2% last week to finish at 2976.80. Monday did see a new all-time high close of 3014.30. The market is now up about 20% on the year, with tech stocks leading. Stocks skidded sharply in the last two hours of trading Friday on news of Iran reportedly seizing a British-flagged tanker in the Persian Gulf. Among stocks, video-screaming company FANG stock Netflix got its wings clipped, after widely missing paid-subscriber growth projections in the second quarter. The stock fell 13%. Indeed, the second quarter earnings report season kicked off in earnest last week, with roughly 56 companies in the S&P 500 index reporting. According to FactSet, some 15% of companies in the index reported results, and EPS is tracking currently at negative 2.1% compared to the same period of 2018. A few weeks ago, the projection was for minus 2.7%, so improvement is evident. I know quarterly earnings are important, but don’t overdo it. That is, the constant headlines warning about an “earnings recession” (two consecutive quarters of negative EPS growth) should be taken with a couple of grains of salt. As a recovering journalist, I can vouch for the fact that bad news sells, and the worse the news seems the more papers get sold. Second, remember that the second quarter is in the rearview mirror already. The market discounts the future, not the past, and right now 2020 EPS growth, about 11% expected, is probably more important than the 2Q EPS. For more on this, see our July 17 Signal from Noise story, “The ‘Earnings Recession’ is Here! Look Through It.” In short, the report notes that over the past five years actual EPS growth for S&P 500 index companies has tended to be better than analysts’ expectations. I don’t see anything different in this latest quarter. Focus on 2020. As I noted above, there was some sentiment midweek that perhaps the Fed would cut the Fed futures rate by 50 basis points instead of 25 bps. I think 50 bps is unlikely. Historically, and short of dire data, the Fed has been a gradualist in terms of changes, particularly when there is some uncertainty about the economy’s growth—as now. Second, a 50 bps cut could shock some investors and immediately bring up the idea that perhaps the Fed knows something the rest of us don’t, as in, what if the economy is much worse off than thought? And actually the U.S. economy isn’t bad at all. For more on this see page 3 and page 6. Bottom Line: I wouldn’t be surprised by near term softness, but the bull trend seems intact. Quote of the Week: In a CNBC interview BlackRock Inc.’s founder Larry Fink said “people are under-invested in equities” now and said that investors shouldn’t pump the brakes on stock buying even as the market trades in record territory. Fink noted the Fed’s change in tone that corporate earnings are coming in “pretty well,” which underpin recent gains. “At these levels, markets are going to trend higher,” he said. That’s what we’ve been saying. Questions? Contact Vito J. Racanelli at vito. racanelli@fsinsight. com or 212 293 7137. Or go to /.
- Your Weekly Roadmap
After Robust 1H19 for Equities, More Could Be in Store
Well, we might as well have kept the stock market closed this week. Traders had their hands in their pockets, as investors were keyed up about the upcoming talks at the G-20 meeting in Japan. Not much happened amid low trading volumes. Last week, stocks were down slightly, as the Standard & Poor’s 500 index gave up 0.3% to 2942. Obviously, Monday’s market open could be significantly impacted by the weekend US/China talks—or lack thereof. If there’s some sort of deal, any deal, it will be interesting to see if stocks react well in the short term, or if such a denouement is already discounted. A poor showing by the trade negotiators will likely lead to a deterioration in sentiment and lower stock prices. But as I’ve said before, in the longer term I find it difficult to believe that we won’t have a deal at some point before the presidential election in November 2020. Set that aside, and investors have to celebrate at the half year mark. So far, the Standard & Poor’s 500 index is up 17% this year and 25% since the ugly day of Dec. 24, 2018. For the month, stocks are up 7%, which would be the best June since 1955, and 4% for the second quarter. What’s not to like? Nevertheless, for all this good news, when you step back from the market we aren’t too far above the highs of September 2018. Things feel better, but only in comparison to December’s swoon. In reality, the new highs of June were just a tad over the old high of September, so we’ve been running in place for all intents and purposes. I don’t see any traditional euphoria in the stock market, which is the typical precursor to a bear. Still, there are plenty of high spirits in pockets of the market: crypto currencies, marijuana stocks and certain IPOs, like Beyond Meat (BYND). Still, I think we could have a breakout in the second half. For more on this see Tom Lee’s article on page 3. Past performance doesn’t guarantee future returns, but looking at history often supplies some useful context. According to Bespoke Investment Research, since 1945, when the S&P 500 Index has been up in the first half of the year, as it is now, the index has averaged a gain of 1.3% in Q3. When the S&P has been down in the first half of the year, the index has averaged a decline of 1.3% in Q3. After a gain of more than 10% in the first half, stocks tacked on an additional 7.5% on average in the second half, but it was relatively flat when the index fell more than 10% in the first half, according to BIG. Tom Lee makes a persuasive case for a higher market by the end of the year, but investors still need to keep an eye on things. As we come to the end of the first half of 2019, what should we be watching in the second half of the year? Well, at 120 months, the U.S. economy just completed year 10 of this economic expansion, now officially tied for the longest business cycle expansion in the post-war period, according to FactSet in a recent report. While most economists will tell you that expansions don’t die of old age, the odds of fatal missteps increase the older they get, says FactSet. Keep an eye on the yield curve, where the spread between the 3-months bill and 10-year note has turned negative at minus 12 basis points recently from 100 bps positive last October. I’ve said the latter isn’t a particularly good signal but watch the 30 year-10 year spread, which is important and has widened. FactSet also said that in reaction to the increase in global trade tensions, there’s a slowdown in global manufacturing activity, as evidenced by the dramatic decline in many countries’ manufacturing purchase manager index readings over the last 18 months. Within the G7, only the U.S. and France are currently showing expanding manufacturing sectors. And gold prices, which are at six-year highs, deserve your attention. Expectations of lower long-term interest rates and the resulting weaker dollar are both contributing to gold’s strength. Separately, U.S. economic growth was 3.1% annual rate in the first three months of the year, the Commerce Department said Thursday, stronger than the 2.2% rate in the fourth quarter of last year. Personal-consumption expenditures, a measure of household spending on everything from carpet cleaning to computers, rose a seasonally adjusted 0.4% in May from April, the department said Friday. Spending growth also was stronger in April than previously thought. The department lifted its estimate to 0.6% from an originally reported 0.3% Bottom Line: Continued choppy action through Q3. Quote of the Week: From WSJ: Ahead of a meeting on Monday, some OPEC member nations are expected to argue for deeper curbs than previously agreed, OPEC officials say. But Saudi Arabia, OPEC’s de facto leader, is unlikely to back those proposals. “This is not going to happen,” said a Persian Gulf delegate. “Everyone should strictly comply with the [existing] cuts.” Questions? Contact Vito J. Racanelli at vito. racanelli@fsinsight. com or 212 293 7137. Or go to /.
- Your Weekly Roadmap
Fed Hints at Rate Cuts, Stocks and Bonds Party On
Funny what a couple of words from the right person can do. It’s true that happy times can follow on a comment from your spouse, or your boss. Or just maybe—if it’s the stock and bond market—it’s a few words from the Federal Reserve chairman. Since the Great Recession of 2008 and the stock market trough in 2009, it’s been clear that the stock market has risen on the growth of earnings per share but also on the succor from a Federal Reserve that has gone to great lengths—read that quantitative easing—to support financial assets in general and equities in particular. And it’s happened again. Truth be told, the tinder was laid by a comment—I mean tweet—from President Donald Trump who said Tuesday that he had “a very good telephone conversation” with China’s President, Xi Jinping. (See page 11.) Once the Fed chimed in Wednesday about a potential rate cut, the match was lit and it was rockets red glare for stocks and bonds (see page 5). The rise in oil prices helped the energy sector, which was up almost 3%, but not so high enough to put investors off, given the increased tension in the Middle East after Iran downed a U.S. drone. Equities partied so hard last week that new all-time records were set Thursday, though markets eased back slightly Friday. The Standard & Poor’s 500 index rose 2.3% to finish around 2950. And this time round, the venerable Dow Jones Industrial Average—which hadn’t produced new highs in April when the S&P 500 did—also reached all time highs Thursday. Friday it closed at 26,719, up 2.4% on the week. The DJIA had been lagging, says Peter Andersen, who runs Andersen Capital Management in Boston, mainly on the trade fears. The Dow is chock-a-block with giant global companies whose revenues come from all over the world. Hence, he notes, investors only reading the tariff headlines were concerned that these companies would be unduly affected by an intensifying trade war. The market’s view on trade friction is a bit simplistic, Andersen continues. Indeed, the trade tiff between the U.S. and China has been generally not well understood by investors, he says. The situation was never going to be resolved in days and weeks, as the president said over and over again in tweets. Investors believed that, but the reality is more nuanced and complicated. The Chinese government is said to take the longer view, thinking in months and years, he adds. The market is finally adjusting to the idea that a deal will come but that “it isn’t going to be quick,” Andersen says. President Trump and Xi Jinping are expected to meet at the G20 Summit next week in Japan. With the economic data kind of “meh,” perhaps markets are sniffing out a somewhat better than expected world in the intermediate term. Andersen is sanguine about the next three to six months based on decent expected earnings growth and low unemployment numbers. The market’s price/earnings ratio is 17.7 times this year’s EPS and 15.8 times next year’s EPS. Now I realize that all this can go to smithereens in heartbeat, given the state of world events. The downing of the U.S. drone by Iran could have—and might yet still—turned out far worse, for example. And yes, the global data isn’t so sweet. Friday’s European factory output data suggested a decline in activity for the region, as the IHS Markit Eurozone Manufacturing PMI came in at 47.8 in June 2019, versus consensus expectation of 48. Meanwhile, orders booked at Japanese factories were at the weakest level in three years. Moreover, though I remain bullish I admit to recognizing some cognitive dissonance in the bond market, where the yields on the 10-year briefly slid below 2% before finishing at 2.06%, down from 2.08% one week ago. The bear looks at that and says, “See, the bond market is telling you a recession is possible.” The bull looks at that and says yields are dropping because the Fed is telegraphing that it will reduce the Fed funds rate soon. Again, I tend to go with the latter—at least until the global economic numbers worsen appreciably, which I don’t expect. For more on why that might not happen, see Tom Lee’s comments on page 3. Bottom Line: Continued choppy action until Q3. Quote of the Week: From The Wall Street Journal: “We were cocked & loaded to retaliate last night on 3 different sights when I asked, how many will die,” Mr. Trump wrote on Twitter on Friday. “150 people, sir, was the answer from a General.” Questions? Contact Vito J. Racanelli at vito. racanelli@fsinsight. com or 212 293 7137. Or go to /.