Eq: Value (38)
The market has been very up and down lately. 50 bp losses or gains in a day feel pretty standard by now. But all of that may be wreaking havoc on investors’ nerves and portfolios. So what is the best way to hedge against the volatility? Most low volatility funds invest in stocks with a low beta, or those that change little compared to market movements. However, there may be an even better way to go about hedging. AGF has an ETF call BTAL, which not only buys low beta names, but also shorts high beta ones, all in equal weight with equal sector balance. In bouts of volatility, those shorts tend to really help gains in a way that holding long-only positions does not.
FINSUM: This seems like a smart approach that gives a sophisticated level of protection to investors. Worth a look.
For some reason, there is a great deal of glee about the return of value stocks this month. Even though we are only on the 17th day of September, seemingly ever research department on Wall Street is ready to proclaim that value stocks are back. BAML fits the bill perfectly, saying that value stocks are like a tightly wound spring that is finally uncoiling. In their defense, value stocks have outperformed growth stocks by 9 percentage points this month, the biggest divergence since 2010. Morgan Stanley also notes that there is currently “a massive rotation away from growth-style factors toward value-style”.
FINSUM: It has been a great start to the autumn for value stocks, but they have been in a funk so long that it is hard to believe they have suddenly shed their shackles.
It has been for around a decade that value stocks have been getting hammered by growth stocks. The rut has been so bad that many have given up on the discipline altogether. But recently, something has been changing. Momentum stocks, long the darling of this bull market, have started to lag their value-oriented peers. This change started last week and is continuing today, and follows the worst month for value stocks in at least 20 years (this past August).
FINSUM: This is an encouraging sign, but certainly is not enough to say “value stocks are back!”.
How to defend against this tough equity market? Some say to buy defensive sectors like healthcare and consumer staples. Others buy gold. Ironically, however, the best protection may be to stick with the old 60/40 balanced portfolio. Despite all the market turmoil recently, if you had been holding a 60% SPY and 40% AGG portfolio over the last month you would have had a net return of negative 0.62%, which is pretty good considering how ugly markets were. If you had been holding it for the whole year, you would have a sterling return of 14.45%.
FINSUM: These stats are a testament to old fashioned diversification!
Investors tend to go to the same old ports to ride out the storm of a recession—gold, Treasuries, healthcare, utilities etc. However, finding a new safe haven can be not only the means to good protection, but also solid capital appreciation. With that in mind here is a very unglamorous, but potentially lucrative idea—buy garbage stocks. We don’t mean bad stocks, we mean stocks of solid waste companies, like Waste Management, Waste Connections, and Casella Waste Systems. Garbage companies are highly recession tolerant (it is not as if there is less garbage), and they tend to throw off huge amounts of free cash flow. Michael Hoffman, an analyst at Stifel is recommending these shares.
FINSUM: This seems like a very good recession hedge. Garbage is a very durable sector. Will this be the next recession star?
Quickly, name a sector that Wall Street hates right now. Auto stocks should come to mind. The car industry is in a sales downturn and is in the midst of broader upheaval brought on by electric cars, new competitors, and changing ownership patterns. The Nasdaq Auto Index is down almost 20% in the last year. However, all the changes have created an opportunity to buy into the sector, but not in car companies themselves. Instead it is high tech car suppliers that look attractive as they have a unique niche to fill in the changing industry. Check out Aptiv, Visteon, and BorgWarner.
FINSUM: This seems like a smart way to play all the shifts happening in the automobile industry.
There are a lot of retirees, or near retirees, who have not had to navigate real market volatility for around a decade. And as any retiree knows, high volatility in or at retirement is a very scary prospect. However, there are ways to navigate it. Some tips including keeping a cash buffer, going bargain hunting in the market to find undervalued stocks, and re-evaluating stock exposure. Rotating into sectors that do well in downturns, like consumer staples, healthcare etc, can also be smart.
FINSUM: This is good advice. That said, the US may not be headed into a really bad economic and market scenario, so it may not be wise to get too defensive.
How might retail stocks react to rate cuts? That question hasn’t gotten much air time lately, but is a good one considering how much investment there is in the sector. Generally speaking, low rates should be good for the sector as they would technically stoke consumer spending. However, the logic there gets skewed based on the underlying economy (i.e. how it is trending). For the current environment, the answer is that some retail stocks will benefit handsomely, while others will struggle. The “haves” will do well, while the “have nots” will continue to suffer. The “haves” include Amazon, Lululemon, Costco, while the “have nots” include cash strapped retailers like Gap and J.C. Penney.
FINSUM: So basically a rate cut will help those who are already doing well, but won’t do much for the rest of the sector. This makes sense, as it is hard to see consumer spending changing much at the current stage of the cycle.
The market may be way up this year, but there are still some great values out there. The average P/E ratio of the S&P 500 is 16.7, yet 67 of the companies in it trade at below 10, triple the amount of five years ago. Here are a handful of blue chips that are very cheap, but have strong market positions, decent profitability, and nice growth positions: Delta Airlines, Bank of America, Kroger, homebuilder Lennar, and BorgWarner, a maker of car components.
FINSUM: These seem like great picks, but they also appear to be the victims of the long-term decline in value investing. Investors keep thinking value investing will bounce back, but it hasn’t.
The market’s outlook grew significantly dimmer yesterday. The Fed made clear that investors should not expect a rate cut in a July, which took the wind out of equity investors’ sails. With that in mind, here is a list of ten stocks that should help investors win in a downturn. The theme here is “low volatility” stocks, or stocks with less risk that should outperform the market in a choppy environment. The list: Aflac, Amdocs, American States Water, Atmos Energy, DTE Energy, Duke Energy, McDonalds, NextEra Energy, OGE Energy, WEC Energy Group.
FINSUM: Given the Fed’s reversal from what the market thought was its stance yesterday, right now does seem like a good time for low volatility stocks.
Low volatility stocks aren’t behaving the way they are suppose to right now, but that is what makes them interesting. Stocks chosen because of their generally low volatility tend to perform poorly in up markets as their low beta means they underperform benchmarks. But the nature of this year’s rally has defied that idea. Stocks are up 18% this year, but there are still many worries about the economy, the combination of which has given a big boost to otherwise boring stocks. Even during the losses of May to June, low vol stocks barely lost anything even though the market plunged.
FINSUM: There are a number of low vol funds like USMV and SPLV which are good choices for this area. These stocks seem like they have found a sweet spot in the current market environment.
You might not think it is the right time for this stock, but Goldman Sachs says you should. The bank has just come out very positive on Ford. The automotive company has far outpaced the S&P 500 this year, but is still down 16% over the last 12 months. Goldman says that Wall Street is not appreciating how significant Ford’s recent restructuring is, as they think it can unlock “billions in trapped value” by lowering costs in the trucks division.
FINSUM: Basically, Goldman says Ford is going to see a big and sustained pop in earnings that no one sees coming. It is a nice, simple thesis and we like it.
If you follow Warren Buffett at all, you will know that one of his main investing philosophies is to buy companies with a wide moat, or a major defensive position in their industry which blocks competitors from grabbing market share. It seems second nature to want to invest in such stocks, however, research suggests they may not perform as well as one would think. The reason why is that wide-moat stocks are often very popular, which means they get overpriced as investors pile in. Because of this, companies that consumers love often have returns that lag lesser companies. “Great companies don’t always make great investments”, says the CIO of retirement for Morningstar Investment Management.
FINSUM: This is a really a matter of timing. At some point these popular companies see a big run up in their stock, so it is more a matter of buying them early than saying they underperform.
Will the robotaxi model come to dominate the car landscape or will the current ownership model persist? Will electric cars come to dominate? These are big questions for the US automotive industry. However, the answer is that it likely won’t matter because Detroit will win either way, especially GM. While Tesla would have no backup plan if electric cars didn’t become mainstream, GM could continue on with its main business line. Further, GM has a valuable self-driving card division, Cruise, which could do very well if robo taxis become the predominant model.
FINSUM: A couple things to note here. Firstly, GM is the cheapest stock in the S&P 500 on an earning basis, so it has a lot of upside. Secondly, we don’t think the robo taxi model will take over as the cost per mile to the end consumer is likely 2-7x the current cost, which means there would need to be massive changes to make it competitive.