Eq: Value (73)
Starting with the huge gains of tech shares over the summer, and now the whole index, investors have grown increasingly uneasy with market valuations. By some metrics, markets are as stretched valuation-wise as they have ever been. Take for instance Robert Shiller’s famed CAPE ratio. As it stands now the S&P 500 has a CAPE valuation of 33.4x. That is the highest it has been since 1929 and almost double the long-term average of 17x. ”There are great expectations built into this market … We are in the seventh inning of Federal Reserve-supported equity markets”, says the CIO of CIBC Private Wealth Management.
FINSUM: As scary as the valuations are, they are not entirely irrational given the level of stimulus and the way the economy has held up.
With markets at all-time highs, but COVID restrictions tightening and the potential for a blue Senate looming, many advisors are feeling that now might be a good time to retreat into value stocks. Lower priced stocks have done very well over the last couple of months, showing good momentum on top of their theoretical valuation insulation. With that in mind, here are three very highly ranked large cap value mutual funds. The first is American Funds’ Washington Mutual Investors Fund Class A (AWSHX), sporting an expense ratio of 0.59% and an average three-year return of 9.7%. The second is the MFS Equity Income Fund Class A (EQNAX), which holds a more diversified group of securities, including some international stocks and convertibles. Finally, check out the Fidelity Equity-Income Fund (FEQIX), which tends to focus on income-producing securities.
FINSUM: A nice hybrid between appreciation and income is a good approach for right now, so the latter two seem look good buys. More broadly, value stocks appear a smart choice given the particular moment in markets.
Okay maybe it’s not a “boom” but it is certainly a “boomlet”. Alongside all the uncertainty in markets surrounding the election, value stocks have been having a moment in the sun. The reason why is interesting and seems to be two-part: one aspect is idiosyncratic, the other more macro. On the idiosyncratic front, many bank employees tend to get very conservative with their investments at this time of year because many financial companies end their fiscal year’s before December 31st. What those employees do is sell their winners and buy beaten up value stocks. It happens every year, but the effect might be bigger this year because tech stocks have gained so much. On the macro front, one big thing helping value stocks is that the COVID vaccine has given hope to “normal” economy companies. Those stocks have done very poorly this year, so are squarely in the “value” category.
FINSUM: If a vaccine is widely available soon—and people actually take it—a return to some version of the pre-COVID economy is seems likely. That said, things will have changed and there will be some stocks that continue to struggle. Choose wisely.
Large cap value is a very interesting area at the moment. Over the last few weeks there has been a pickup in breadth, with gainers outpacing losers 2-to-1. Megacap tech stocks are not leading the market like they were early on in the recovery. That means the chances for broad market gains are looking stronger. With that in mind, large cap value looks like an excellent choice. Compared to small and midcaps, large caps are less volatile and more diversified. They do have more international exposure (which could be a positive or a negative), but on the whole they appear as though they have as much or more upside potential with less downside risk.
FINSUM: If you believe in a coming broad-based rally in stocks, then large cap value seems like a good place to be.
FedEx and other logistics providers have risen alongside other stocks, but their gains have not been nearly as prolific as some of the ecommerce providers they service. However, that may be about to change. Multiple Wall Street analysts are changing their tune on the company, saying that the stars are aligning for the stock. In particular, UPS is starting to raise prices, which will help FedEx with profitability alongside the huge explosion in ecommerce volumes that has coincided with people staying at home. Furthermore, as a vaccine is developed, FedEx and other logistics providers will need to deliver millions of doses of vaccines, which will be another boost.
FINSUM: Two big factors here really—UPS and USPS are raising prices, allowing breathing room for FedEx; and…FedEx is a leader in temperature-controlled shipping, which is what will be needed for vaccines.
There has been a lot of negative press about the fate of retail under COVID, and with good reason. Brick and mortar businesses have been devastated and the bankruptcies have been relentless. However, one of the less noticed aspects is that many ecommerce businesses are doing very well. In fact, some retail ETFs, like the Amplify Online Retail ETF (IBUY) have been surging as stocks like Carvana, Overstock.com, and Peloton have seen their shares soar.
FINSUM: Ecommerce is a great bet for right now and for the foreseeable future. In its most basic sense, all COVID did to retail was accelerate the shift to ecommerce into a much faster gear. It was like a five-year jump in four months. There is no reason to expect that to revert any time soon.
Where do you stand on airlines? Your opinion is worth about as much as the whole market’s—nobody is quite sure what to make of the future of air travel right now. Airlines had seen rising passenger numbers, but that has been tapering off as COVID cases have been rising again. Delta announced dreadful earnings yesterday, with revenue down 88% and net losses worth $4.33 per share. Thy also announced they were cutting their flight additions for August in half because of the rise in cases. The earnings come alongside a bleak announcement from United, which said “it's increasingly likely that travel demand will not return to normal until there is a widely available treatment or vaccine."
FINSUM: Have airline stocks come back too far? It looks there is likely to be at last another ugly 18 months as we await a vaccine.
One interesting investing strategy (admittedly always for a small minority of a portfolio) is to look at the very worst stocks in the market for a contrarian bet. Of all the thousands of publicly traded and analyst-covered stocks, just 90 have no “Buy” ratings from a single analyst. Out of that down and out basket, there are three interesting stocks to consider; shares which could do well if the economic recovery even goes just a little bit right. The stocks are: Sally Beauty Holdings (beauty supplies to consumers and salons), Michaels (the arts and crafts store), and Blackbaud (a software provider to the non-profit space).
FINSUM: Of these, Michaels is moderately interesting because they just brought in a new senior executive from Walmart, which should help improve margins and store performance, which could lead to good multiple expansion.
The market has been highly topsy turvy lately. With no real direction, stocks have been swinging back and forth based on economic and COVID news from day to day. With this kind of market looking likely for the near term, Goldman laid out some of its best picks for this kind of environment. Speaking about the market generally, the bank said “Consensus expects 9% upside to the typical stock over the next 12 months and volatility should remain elevated through the rest of the year, suggesting low risk-adjusted returns in the coming months.” Its stock picks included: Merck, Verizon, Philip Morris, General Motors, Comcast, Mondelez, and Coca-Cola.
FINSUM: A lot of old blue chips here whose earnings aren’t likely to be hurt too much by COVID.
Airlines had a pretty good run headed into last week’s downturns. Other travel stocks did too. However, the markets really seem to have gotten ahead of themselves, because the big rallies appear to forget some fundamental changes that might be taking place under the COVID lockdown. While a knee-jerk rise in share prices alongside the lifting of lockdown orders might be logical on the surface, it ignores the fact that a great deal of domestic US travel is for business, and attitudes towards business travel have changed remarkably since March. Many companies have found remote work even more productive than office work, and no longer see the need for travel. Also, it is easier to cut travel budgets by 50% than it is to lay off more people.
FINSUM: We think there is going to be serious changes to the business travel paradigm that prevailed pre-COVID. It has now been demonstrated that similar levels of sales can be achieved by videoconference, and when you count the cost and time of travel, it is clear that companies are going to permanently cut budgets.
It has been a long, long, time since value stocks really had a shining moment. Growth has been outperforming value for over a decade now. However, strategists at JP Morgan say that value stocks may start to shine very soon. This underlying parts of this economy—weaker but still improving—are the exact conditions where value stocks traditionally shine. These pre-requisites for success seem likely to stay in place. There does not appear to be a second wave of infections brewing, there is ample government support for the economy, and economic data is trending more positively than negatively.
FINSUM: The typical rotation into value (such as in 2008-2009) takes over 100 days and has 18% upside. The logic here is sound, but we still wonder if value will outperform growth.
Morgan Stanley says the big gains in travel stocks are way overblown and will likely prove dangerous to investors. Carnival, Royal Caribbean, and Norwegian have all seen their shares rise in the double digits recently as investors have grown increasingly optimistic about their prospects and their cash reserves. However, Morgan Stanley threw cold water on those sentiments, saying “The cruise industry will take longer than almost any other form of travel to return to normal” as it downgraded the stocks to Underweight (two of them were already Underweight). UBS also pointed out that there will likely be no meaningful cruise activity until next year.
FINSUM: Even once cruises get running again, all it will take is one minor flourish of COVID—and the associated news cycle—for the whole sector to freeze up again. Too risky to invest in at this point.
The stock market may be complicated right now, but some things are abundantly clear. One of those is how the retail sector, and retail stocks in general, are going to react to the crisis. The answer is that big players are going to continue to grow, largely at the expense of smaller retailers. Bigger companies, with sophisticated websites and massive free shipping operations, have been thriving as small companies falter.
FINSUM: Think Amazon and Walmart, maybe Shopify (see other story about Shopify from today), as these companies will be the ones winning orders from customers over the short and long-term.
There has been a lot of gloom for the auto industry lately. With showrooms and dealerships almost completely shut, car buying has dropped off a cliff, leaving auto companies sitting on big inventories with little demand. However, early signs from China and Europe are showing that the lockdown may have led to pent up demand for cars. In one sense, there is natural pent up demand from the closure of dealerships, but more interestingly, there seems to be more demand than usual. This is because people are growingly afraid of public transportation—in some cases governments are warning against using public transit . This means people are seeking the relative safety of traveling in their own vehicles.
FINSUM: This idea of surplus demand for private vehicles because of fear of the virus makes perfect sense. Auto stocks undervalued?