US COVID-19 Spread Easing; 17 Attractive “Epicenter” Stocks
Last week’s SPX 5% gain while mass protests have taken place across >350 communities seems incongruous. I understand anyone who thinks the equity market is somehow ignoring massive social unrest. These protests are the most widespread—resonating with the public so strongly—that one has to go back 50 years to find a similar time in history – 1968.
But the fact is the equity market is not a moral compass. We did get incremental economic news that was “half-full,” especially on the cyclical components of the economy. American Airlines (AAL) increasing capacity this week is highlighting perhaps that Americans may be moving more quickly to a pre-COVID normal than we expect. The “epicenter” stocks surged >10% in the past 4 days… that is the real story.
For example, airlines posted 4 days of spectacular gains and were up 13% on Thursday, while casinos surged 13% in past two days. Remember the “hopeless” energy sector? It’s up 8% in the past few days. Wow. The huge amounts of “dry powder” seem to be finding their way into cyclical stocks. This is the reason we think the “fresh money” strategy needs to be “less barbell” and pretty much outright buy the epicenter.
We asked our macro team to identify “early in the barbell recovery” stocks that are still well off their highs but are considered fundamentally attractive based on the work of our head of Global Portfolio Strategy, Brian Rauscher and Head of Technical Strategy, Rob Sluymer, or that screen attractively based on the quant work by our data science team led by Ken Xuan (aka tireless Ken). See Point 3.
POINT #1: US overall COVID-19 cases did not see the typical midweek surge of cases, which could be a positive change — albeit, a one-day effect. The high case numbers are now generated away from the NY tristate area, such as CA, TX, and AZ, among others.
On a 7-day rolling basis, to smooth out the weekend lag effects, we can see yesterday’s cases numbers are down 1,666 from a week ago, the first 7 days drop in 5 days. So again, with the rise in tests, it is positive to see the drop in cases. On the other hand, it is possible that mass protests have now triggered a 1,000 or even 10,000 super spreader event. Thus, we will not know for 2 weeks whether a second wave is upon the US.
POINT #2: FLARE-UPS: We have to keep in mind many states have increased testing substantially, so the rise in cases is a result of expanded testing. But only four states have case growth > test growth: UT, AK, AZ and AL. For contrast, in CA, total cases are up 27% in past 10 days but total tests are up 33% in the same timeframe, and in NY, total cases are up 3% but total tests are up 32%.
In a way, these hard-hit states have seen the best improvements, almost as if the states have “exhausted” the vulnerable population and thus, see case growth diminish.
POINT #3: “LESS BARBELL” Stock Ideas. We believe investors should use “less barbell” and overweight stocks in the “epicenter” and also “social distance victim” equities.
As the economic visibility improves, these stocks stand to see the strongest gains. And additionally, the fact that these stocks are under-owned and also still well off their highs and with valuations on a P/S basis that are attractive (as I noted last week), make the risk/reward solid.
We have identified 17 stocks ( see table above) that are “early in the barbell recovery” as these stocks are still well off their highs but are considered fundamentally attractive based on the work of our head of Global Portfolio Strategy, Brian Rauscher and/or Head of Technical Strategy, Rob Sluymer, or screen attractively based on the quant work by our data science team led by Ken Xuan (aka tireless Ken). The “middle of barbell recovery” tickers can be seen in the table above. The “late in the barbell recovery” tickers (but still buyable) are: AAP, BWA, DLTR, IEX, GWW
Bottom line: The “epicenter” are reasonably priced and the risk/reward best there.
Figure: Comparative matrix of risk/reward drivers in 2020
Per FS Insight
Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019
