The market is churning at record levels as Covid fears ramp up and political uncertainty swirls, but there are still buying opportunities for investors.
On Tuesday, Stephanie Link of Hightower Advisors, Josh Brown of Ritholtz Wealth Management, investor Pete Najarian and I joined Scott Wapner on CNBC’s “Halftime Report” to interview Oakmark’s Bill Nygren. We shared our strategies over navigating a market that closed at a record high. Steve Liesman, CNBC’s senior economics reporter, also shared his investor survey, which highlighted inflation fears and investor caution.
Just as it seemed that a Covid resurgence, rising prices and political uncertainties would take the wind out of investors’ sails, stocks continued to reach new highs.
From ample capital and liquidity to surging corporate earnings, there are many fundamental reasons for stocks to be up nearly 18% year-to-date. The ever-present question for investors is “what’s next?” Frustratingly, the ever-present answer is “no one knows.” Plotting a reasonable, rational course through heightened uncertainty is the primary goal of every successful investor.
Indeed, the market is expensive, but on “Halftime Report” I mentioned five stocks that I would buy today with new cash. They appear at the end of this article.
Oakmark’s Bill Nygren breaks down the stocks he’s buying and selling
The companies are a mix of value and growth, and they operate in four different industry sectors. The common thread between them is that they all have dynamic management teams with proven track records of adapting to change.
Make no mistake, the U.S. economic recovery has been robust well beyond the wildest expectations. While future growth may come at a somewhat slower pace than the last couple of quarters, the economy looks on track to continue expanding.
To be sure, there are several threats to future growth, including the delta variant of Covid-19, supply chain disruptions, inflation, growing trade deficits, a more assertive Chinese government, etc. But there are always potential landmines to sidestep. I often describe myself as a very worried optimist. Our responsibility is to find the most prudent, reasonable path toward our clients’ prosperity. We are doing that.
Markets move higher despite growing concerns over delta variant
The S&P 500 closed at a new record Tuesday — and again on Thursday — as Steve Liesman’s economic survey showed that just 32% of respondents think now is a good time to buy stocks. This is what the pros refer to as a “contrary indicator.” Though it seems like a data point that would argue for caution, it’s a sign that the bull market may have further to run.
The rationale is that low investor-sentiment readings mean there is still a large pool of potential future buyers who are still unconvinced of the market’s attractiveness. When investor sentiment is high, on the other hand, most investors have already voted with their money, leaving few potential converts to take the market on its next leg higher.
Emotion is the foe of the long-term investor. Our dispassionate discipline and dogged research will continue to light and steer our way forward. As they say across the pond, “Stay calm and carry on!”
Data as of Aug. 3
Visa (V – $237.09)
Year-to-date performance: +8%
Market capitalization: $520 billion
Forward price-earnings (CY2022): ~31x
Dividend yield: 0.5%
Projected 5-year growth rate: 15%
Visa is a recovery play given the importance of travel and cross-border transactions to its overall business. Most of Visa’s travel exposure is on the consumer side (rather than commercial), and we would expect consumer travel to return to historical levels faster than business travel. Visa is also well-positioned to benefit from a long-term trend of plastic displacing cash, which is a trend that has accelerated during Covid and we believe will continue to benefit Visa over the longer run.
Truist Financial (TFC – $55.31)
Year-to-date performance: +15%, but down about 12% from high in May
Market capitalization: $73 billion
Forward price-earnings (CY 2022) ~11x
Price/book: 1.2x; price/tangible book 2.1x (per Farr, Miller & Washington analysis)
Dividend yield: 3.5%
Projected 5-year growth: 8% to 9%
This is a high-quality, conservative bank with diversified revenue streams and strong prospects for expense and revenue synergies from the merger of SunTrust and BB&T.
CVS Health (CVS – $84.00)
Year-to-date performance: +23%, but down 7% from high in May
Market capitalization: $110 billion
Forward price-earnings (CY 2022) ~10x
Dividend yield: 2.4%
Projected 5-year growth: 10%
CVS trades at a very attractive valuation. The Aetna merger has been a very complicated story, and one that the markets have tended to ignore, which has made for frustrating performance for much of the last two years. However, we believe CVS’s management team is forward-thinking about health care service and delivery over the next generation, and we feel CVS is just beginning to reward the patient investor.
Valmont Industries (VMI – $237.89)
Year-to-date performance: +36%, but down ~10% from high in May
Market capitalization: $5 billion
Forward price-earnings (CY 2022) ~19x
Dividend yield: 0.8%
Projected 5-year growth: 10%
Valmont is an infrastructure play, with exposure to energy generation and transmission, wireless telecommunications, transportation, and agriculture, among other end markets. The company is also getting more involved in some areas with more secular growth prospects, like AI-enabled irrigation equipment and renewable energy. The company should benefit from a large-scale infrastructure package, but management has proven over the past four years that it can execute even if “infrastructure week” never comes.
FedEx Corp (FDX – $280.81)
Year-to-date performance: +8%, but down ~12% from high in May
Market capitalization: $75 billion
Forward price-earnings (CY2022) ~12x
Dividend yield: 1.1%
Projected 5-year growth: 12%
The stock has pulled back as management flagged labor shortages and wage pressures while also forecasting a greater-than-expected increase of 22% in capital expenditures in its fiscal 2022. In our view, the problem of too much demand resulting from a massive surge in e-commerce is a good problem to have. Management has proven adept in evaluating the business environment and has shown the willingness to invest and put the company in the best position to mitigate threats and maximize opportunities.
