Invest For An Economic And Profit Recovery

Market corrections force us to test our core beliefs. We still see an overly accommodative Fed providing excess liquidity; a government providing added stimulus eventually; vaccines, better therapeutics, and rapid response tests on the horizon; and improving growth overseas led by China. While there has not been a change in our overall optimistic view for the financial markets, we have made significant changes in our portfolio composition, adding great companies with more economic sensitivity looking for better days ahead in 2021 and 2022. Each of these companies navigated the pandemic successfully and are coming out with enhanced competitive positions, leaner cost structures, and a stronger balance sheet that has increased free cash flow while still investing for the future.

We funded these purchases with partial sales of our new normal winners as they rose meteorically in August, fueled by tremendous option buying. Was it Softbank (SFTBY)? While we sold approximately 35% of the shares in many of these stocks, we maintained our total dollar exposure as we still see many years of fundamental outperformance ahead. Just as Chuck Robbins, former head of Cisco (CSCO) for 30 years, said, "we are at the beginning of a major new technology cycle that will last at least a decade." If you don't continue to stay at the cutting edge, your company will fall behind and maybe die. This has never been more evident than now during the pandemic, where we see clear-cut winners and losers differentiated by their online capability. This is the reason why we will maintain significant exposure in this area.

Notwithstanding, we see the market shifting over the next year to companies that have substantial operating leverage ahead as the economic recovery accelerates due to rapid response coronavirus testing. That's the real near-term game changer as it will permit faster and safer opening of the global economy over the next year into 2022 when we expect vaccines to be available for all. We are confident that these companies will report surprisingly strong, above-consensus earnings and cash flow in 2021 and 2022. Each one of these investments is selling at a considerable discount to the market and well beneath intrinsic value-creating 30+% upside over the next year plus their 2% to 4% dividends. Not bad!

The two issues moving to the forefront are both tied to Washington: a stimulus bill and the upcoming presidential elections. How often do we say that our politicians need to focus on the needs of the people rather than themselves? We are growing less confident that a follow-up stimulus bill can be passed by month's end before monies supplied by Trump's emergency orders run out. What are they thinking? Are they willing to hurt people to influence an election? It appears so, which is abhorrent. Throw them all out. Our country needs to move back to the center, representing the majority rather than the fringes that dominate politics. We are waiting to hear Biden respond to how his economic plan will promote growth, employment, investment, research, and higher standards of living. We continue to focus on law and order too. Regardless of who wins in November, we expect demand focused stimulus plans next year, including a significant infrastructure program with incentives for businesses to bring back manufacturing to America. We seriously doubt that the Dems would raise taxes until the economy is on the firm footing, which won't be until 2022 at the earliest after we all can be vaccinated.

The economy bottomed in the late spring, picked up steam in July, slowed down mid-July for a few weeks as cases/death rose, but then re-accelerated in August as the number of cases/deaths peaked. Goldman recently boosted its third-quarter GNP growth forecast to 35%. Yes, 35%! Goldman also raised its fourth-quarter and 2021 economic forecasts. The unemployment rate is now expected to be under 8.5% by year-end, whereas earlier forecasts were slightly above 10%. As we mentioned last week, all the purchasing managers' indices improved meaningfully in August, especially new orders. The most important stat of this week supporting our view that better days are ahead was the monthly sales and inventory statistics for July. Sales rose 4.5% from June while inventories continued to decline as production has not increased sufficiently to even meet current demand. The I/S ratio is at a multi-year low, which supports our view that an economic recovery will broaden out supported by rising production, hence our move to economically-sensitive manufacturing companies. We are also watching railcar loading, which is improving week to week.

The winners will be the strong, well-financed global manufacturing companies that will gain market share at the expense of the smaller- and medium-size companies that do not have the financial resources to spend enough on tech needed to compete today. At the same time, we will maintain significant exposure to the new norm tech winners who are the web/internet dominators as their businesses are still in the early innings.

The key to our optimistic view that the economy will get sequentially stronger, both here and abroad, through 2021 into 2022 is rapid response antigen tests with results in less than 10 minutes. It will permit businesses to open sooner with some sense of safety. A great example of what is to come is JPMorgan (JPM) asking its employees to return to their trading desks yesterday. Abbott (ABT) and Roche (RHHBY) are building production rapidly and will have billions of tests available early in 2021. Dr. Fauci is also hopeful that there will be an easy at-home rapid response test, like the pregnancy test, found by the end of the year with ample availability by mid-2021.

While we do expect that at least three vaccines will successfully conclude Phase 3 testing and be available on a limited basis by year-end, we still expect the best, most effective vaccines to conclude testing and be available in sufficient quantity by the second half of 2021. We have not altered our view that the economy will not have an all-clear until mid-2022 at the earliest. That means that the Fed will stay all in providing vast amounts of excess liquidity at least for the next several years, possibly five years if you believe what it has said.

We want to add that green shoots are appearing abroad too, besides China, which is well along in its post-pandemic recovery. ECB President Christine Lagarde sounded optimistic about the eurozone recovery Thursday following a meeting of the ECB governing council. As expected, she, like Powell, cautioned about further outbreaks of the coronavirus in the fall. The ECB revised upwards its forecast of Eurozone economic activity and inflation for 2021 and 2022.

We continue to shift the emphasis of our portfolios to benefit from a global economic recovery supported by vast amounts of excess liquidity created by all monetary bodies, stimulus programs both here and abroad to help bridge to the other side, and the roll-out of rapid response antigen tests which will permit businesses to accelerate opening in 2021 safely. Finally, we expect vaccines to be found and be distributed globally by the end of next year into 2022. We, too, are concerned about large outbreaks of the virus in the fall, which may dampen growth near term, but the trend of improving sequential growth over the next two years is our base case. Also, we expect production to outstrip demand as inventories are restored to normal levels. Finally, we expect surprisingly strong operating margins, profits, and cash flow as managements keep a lid on costs and capital spending.

The bottom line is that we find the market undervalued today with new leaders emerging. We will maintain exposure to the new normal winners at the core of our portfolio as we see only better days ahead for them in this new work-at-home environment. We would use corrections as opportunities to add as we have not altered our long-term positive view. We like industrial commodities and gold too. On the other hand, we continue to recommend the sale of all bonds.

We will listen intently to the presidential debates before coming to a decision. We need economic growth in order to satisfy all the financial/social obligations that we see ahead. We also need law and order offering everyone the opportunity to protest peacefully but not riot. Respect!

Our investment webinar will be held on Monday, September 14th, at 8:30, am EST.

Review all the facts; pause, reflect, and consider mindset shifts; look at asset mix with risk controls; turn off your business news networks; do independent research; and...

...Invest Accordingly!

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

See also Business Cycle Indicators: 16 October on

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos


Seeking Alpha is the world’s largest investing community. Seeking Alpha has unparalleled breadth and depth: from stocks, ETFs and mutual funds to commodities and cryptocurrency, including thousands of stocks (such as small-caps) not analyzed elsewhere. Written by investors for investors, more than 7,000 contributors publish 10,000 investing ideas every month.

Learn More