While the latest pullback in the technology sector might represent a decent buying opportunity, MoneyLetter columnist John Stephenson believes that 2017’s second half strategy is to favor value stocks over growth stocks. And no sector better represents value than the financial stocks.
It’s easy to lose perspective when investing—concentrating on the short-term noise while ignoring the longer-term signal. In the first half of this year, an investment in the NASDAQ Composite Index has been a winning hand, but with the year more than half over, it needs to be asked if a bet on technology is still a winning hand.
US stocks and the dollar have been under pressure, as investors focused on the latest retreat by technology stocks, disappointing results from Amazon.com (NASDAQ—AMZN), weak data on US wage growth and the latest setback to Republican plans to repeal Obamacare. Oil prices have rebounded, with Brent oil climbing to $52 per barrel, a two-month high following further signs that a global glut may be easing.
The recent sell-off in the tech sector caught many people by surprise. To some it appeared like a ‘flash crash’, but the effect was likely exacerbated in a low-volatility environment. It occurred in a week packed with earnings reports, suggesting the moves could have been due to investors unwinding bets on what has been one of the best-performing sectors in the stock market this year.
Is this time different?
But unlike the dot-com bubble of the late 1990s and early 2000s, the recent strength in technology stocks appears justified by improved earnings, both actual and projected.
Corporate earnings reports released over the past few weeks have largely pointed to continued strength among US firms. With second-quarter results in from nearly half of the S&P 500 companies, the broader index is poised to report earnings growth of about 9 per cent from the year earlier period, according to FactSet, a provider of financial analytics. That would build on gains from the first quarter, when US stocks reported their fastest earnings growth in nearly six years.
Consumer goods stocks have been under attack in recent months, as the Amazon threat impacts one retail segment after another. The reaction in recent months on Wall Street to threats from Amazon has been fierce, punishing the next perceived corporate victim of the online retailer by stripping them of billions of dollars in market value. The wild gyrations reflect the febrile mood among investors as they grapple with the challenges—as well as the potential for profits—from the explosive growth of e-commerce.
Recently, Amazon revealed that it will begin selling consumer appliances from Sears Kenmore. The move sent shock-waves through the shares of big rivals, including Home Depot (NYSE—HD), America’s biggest home-improvement retailer and one that has long been a bright spot amid the retail gloom. At one point in a recent trading session, do-it-yourself retailer Lowe’s (NYSE—LOW) and consumer electronics retailer Best Buy (NYSE—BBY), both of which also market appliances, lost $13 billion in market value.
Investors are now pricing in the chances of almost certain success for Amazon’s ventures. The scale of the stock-price reactions in proportion to what the realistic effect on long-term profits might be is out of line. Underscoring the point, Amazon’s latest quarterly earnings offered a reminder that founder and CEO Jeff Bezos was not infallible. The company warned that it may record an operating loss of as much as $400 million in the current quarter, as it intensifies investment.
The US dollar continued to hover near a 13-month low against a basket of currencies, as the Euro pushed back above the $1.17 level to its highest point since the start of 2015. The Federal Reserve set off alarm bells in some quarters, as a subtle shift in its comments on inflation heightened expectations that a third rise in interest rates this year may not materialize.
What I Recommend
The rationale proffered for investing in the technology sector is that despite the high valuations, tech stocks offer something that is truly prized in this market—growth. The latest US GDP data clocked in at 2.6 per cent in the second quarter of the year, a respectable but unremarkable result, especially with an aging demographic throughout the West. However, it underlined the fact that corporate growth is hard to come by.
While the latest pullback in the technology sector might represent a decent buying opportunity, I believe that the second half strategy is to favor value stocks over growth stocks. And no sector better represents value than the financial stocks.
3 top value stocks to buy right now
One company that I really like is The Blackstone Group LP (NYSE—BX), an alternative asset manager founded in 1985 by Stephen Schwarzman. Under the alternative asset management business, Blackstone manages private equity funds, hedge fund solutions, real estate funds, publicly traded closed-end mutual funds and credit-oriented funds. Financial advisory services provided by the company include mergers and acquisitions, private placements, and restructuring and reorganization advisory services. The company has a deep bench of talent, a focus on reinventing its businesses constantly, and a global footprint. I believe that Blackstone will be able to generate strong fund performance and raise more capital than its competitors. As well, Blackstone boasts a juicy 6.5 per cent current dividend yield, which helps support the share price. I have a ‘buy’ rating and a twelve-month price target of $38 per share for The Blackstone Group.
Citigroup Inc. (NYSE—C) is another US financial services stock that I really like. Citigroup is a global, diversified financial services holding company with $1.9 trillion in assets. Its businesses provide consumers, corporations, governments and institutions with a broad range of financial products and services. Citigroup has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Citigroup has been the laggard among the US money centres, and investors have only recently started to notice. With their legacy issues now in the rear-view mirror and a valuation gap between Citi and the other banks, now is the time to build a position in Citigroup. I have a ‘buy’ rating and a twelve-month price target of $75 per share for Citigroup Inc.
For those investors looking to stay at home, Manulife Financial Corp. (TSX—MFC; NYSE—MFC) is one name that is very attractive. Manulife is Canada’s largest insurer and a leading global provider of financial protection and wealth management products and services. Manulife is also among the world’s largest life insurers, as measured by market capitalization. Business growth in Asia continues to be a strong contributor to Manulife’s bottom line. As well, the top-line trends in wealth and asset management remain solid at MFC, which should support growth in core earnings and return-on-equity (ROE) improvement. Manulife has made recent acquisitions in wealth management (Standard Life, New York Life’s retirement plan services, Standard Chartered’s Hong Kong Mandatory Provident Fund (MPF) business) and has indicated that it will continue to build its global wealth and asset management business without restricting itself to geographies where it currently has insurance operations. I have a ‘buy’ rating and a twelve-month price target of $30 per share on Manulife Financial Corp.
Now might be a very good time to start migrating a portion of your investment portfolio toward tomorrow’s likely winners, and the financial stocks sector is one of the few areas in this expensive market that offers some top value stocks.
John Stephenson is an award-winning portfolio manager and the President and CEO of Stephenson & Company Capital Management Inc. in Toronto. He is the author of “The Little Book of Commodity Investing” and “Shell Shocked: How Canadians Can Invest After the Collapse.” He is also the publisher of Strategic Investor (www.StephensonFiles.com). He can be reached at (647) 775-8360 or (844) 208-8817, or firstname.lastname@example.org.
This is an edited version of an article that was originally published for subscribers in the August 2017/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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