Keith Richards of ValueTrend Wealth Management sees an opportunity to make money when money rotates out of overvalued theme-stocks into overlooked sectors and stocks.
Normally, one or two news headlines dominate the investment media. This headline usually involves a certain amount of fear about stock markets. After all, negative news sells. Sometimes these fear-mongering stories cause pullbacks on the market. As is said: “The market climbs a wall of worry.”
Of late, it’s not just been one or two news items for the media to hype on. In fact, I would think that we’ve experienced something like 10 years of news headlines scrunched into the last 10 weeks. Here are just some of the headlines that we’ve been bombarded with over the past two to three months:
■ COVID health scare statistics hitting us daily;
■ Business shutdowns and recession. Record high unemployment;
■ Government spending like there’s no tomorrow. Fears of how it will be paid back, deflation/inflation talk;
■ The EU/USA trade talks;
■ Election year noise . . . who’s winning, and how will that affect stocks?
■ Oil overproduction, then crash, followed by OPEC (Russia, Saudi Arabia) arguing over cuts;
■ May futures contract sells at negative $40 (you had to pay to get rid of it!) – then a rapid rally back;
■ Stock market crash, rapid rally back;
■ Lloyd protests and ANTI-FA (anti-fascism) terrorism on the streets;
■ China trade deal, Hong Kong democracy threatened;
■ Brazil deep recession and political unrest, Italy potential debt defaults;
■ USD declining, emerging market currency and debt worries.
These headlines probably don’t cover them all. But here’s the strange part:
After the March pullback, markets rose without a single pullback since this onslaught of headlines started.
Investors always face the same struggle during rapidly rising markets that result in stretched valuations. Do you hold or continue to buy in this environment? Or, do you take your money out and seek safety? For near-term momentum traders, the answer is easy. Stay until the chart shows signs of rolling over. For the rest of us, it’s a difficult ask. Ideally, we’d see some kind of medium-term pullback to work off signs of shorter-term speculation and overbought conditions. We might then be more confident in holding our stocks, and even adding to them. But markets aren’t obliged to accommodate our ideals.
So what’s a poor lad or lassie to do?
Recently, I noted in a blog that the greatest investment minds of our time—names like Warren Buffett, David Tepper, Stanley Druckenmiller, Scott Minerd and Bill Ackman—are as confused about the current market moves as anyone is. Anyone, that is, except the ‘dumb money’ (small investors, speculators, and mutual fund buyers). ‘Smart money’ like Buffett and the gang are less enthusiastic about the current market. In fact, they, like us, have been holding cash since late April, ‘missing’ some of the recent rally.
Meanwhile ‘dumb money’ is bullish. That line is now into the low end of its range. This means that the dummies are in control. Not a good thing in the long run. Today seems like the technology bubble of the late 1990s, when dumb money ruled the roost. That was, until the bubble ended with a bang. Dumb money (small traders & speculators, retail investor mutual fund and ETF flow) is particularly enthusiastic about the ‘stay at home economy’ and related stocks, as noted in our last ValueTrend update.
Markets could climb some more
Despite the historic tendency for markets to sell off when ‘dumb money’ is more enthusiastic about stock markets than ‘smart money’, market indices could easily go up another 20 per cent if dumb money keeps buying, given their overweight positions in the stay-at-home stocks (technology, online shopping). Assuming of course that the Fed doesn’t slow its spending. To date (end of June), five stocks have done most of the heavy lifting on the S&P 500:
Facebook, Amazon, Apple, Microsoft and Google have had a +23 per cent year-to-date return. Meanwhile . . . the ‘other’ 495 companies have earned a -8 per cent return.
Or markets could decline
Or, indices might go down 20 per cent if fundamentals come back into play, or if the Fed slows its spending. Every time a Fed monetary program ends, the market goes down.
And yet . . . there is value out there. It’s just not where the dumb money is looking.
The best way to not get hit by a tornado is . . . don’t live in tornado country!
Sure, at ValueTrend, we hold a few tech/growth stocks like Microsoft and Google. But they aren’t an overweight position in our Equity Platform. Instead, we’ve been adding some dividend payers to the Equity Platform. That’s where we’re finding some serious value. We’re emphasizing value names over growth names, keeping a cash component of around 20 per cent, and legging into under-loved cyclicals (gold, metals, etc). We’re also legging a little into some emerging markets (which can benefit from a weak USD/rising global inflation).
1. Hold some cash.
2. Add some commodity and inflation protection.
3. Focus on value names.
The trade-off for not buying dumb money favorites:
If speculation continues, and dumb money keeps buying those tech and stay-at-home stocks, we will still make a solid return, but it won’t match the market returns.
The greatest speculative bubble, or the greatest opportunity of modern times.
What if Amazon really isn’t worth a P/E ratio of 144 times (similar to that of Nortel’s in 1999)? What if Zoom stock crashes because it’s not worth its P/E ratio of 187? What if dumb money investors discover that pizza maker Papa John’s isn’t worth a forward P/E ratio of 65 times?
That’s when value stocks will see money rotate into them. That’s when gold and commodities may outperform. And that’s when our cash holdings will afford us the opportunity to buy cheap stocks. This is either the greatest speculative bubble of modern times, or the greatest opportunity of modern times. Perhaps it’s both!
Bottom line: We see significant opportunity to make money when money rotates out of overvalued theme-stocks and into overlooked sectors and stocks.
A bit of ‘Growth’, with a bit more emphasis now on ‘Value’, hold some cash and add some inflation protection. That’s the way we see it.
Keith Richards is Chief Portfolio Manager & President of ValueTrend Wealth Management. He can be contacted at firstname.lastname@example.org. He may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain projections or other “forward-looking statements”. There is significant risk that forward looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.
This is an edited version of an article that was originally published for subscribers in the July 2020/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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