It’s no secret that investors have decided in 2021 that re-opening the economy means that cyclical stocks are the favorite investment vehicle. But are they?
Economists are expecting a boom this year. Further, with Biden planning to spend additional $Trillions of dollars on things like infrastructure, traditional cyclical companies have come back into favor.
Some of this rotation in favorite companies makes sense. Companies that make sense based on an infrastructure play include: Deere, Caterpillar
But honestly, do you really want to invest in some of these other companies? How about the mall-based retail stores that are soaring, with stocks gaining this year-to-date on average +63%, including Macy’s
Or maybe, you just love those airlines? These stocks are gaining year-to-date on average 25%, including Southwest Airlines
And don’t forget about the commodity stocks. Let’s all run to buy oil companies. Forget the fact that the pro-oil President is now gone and the go-green President is in office. Forget about the fact that oil prices have already rebounded to pre-pandemic levels. Forget about the fact that American drillers start making bucket-loads of money as oil prices have passed $60/barrel and that the Saudi’s will turn back on the spigot to keep all those American wells from coming back on-line and flooding the market. Due to the Saudi oil production increases, the price of oil is not likely to top $80/bbl even during the summer this year. But don’t overlook the fact that oil stocks are up an average this year-to-date of 43%.
Really? So these stocks are your flavor of 2021? Infrastructure makes some sense here. However, retail stocks make no sense here, neither do airline stocks. When have airline stocks ever done well in the face of rising oil prices? And oil stocks have already risen too much to warrant any further investment.
In the current dash-for-trash stocks, investors have forgotten about those companies that are making tons of profits and have the potential to continue to make increasing profits in the coming years (not focusing on weeks and months here, but on years). Instead, investors are focusing their investment dollars on short term predictions which will come-and-go all within this current year.
This year investors are ignoring the high-quality stocks beginning with big tech. This fact has been talked about and written about endlessly in 2021. It is almost literally raining money at some of these big tech firms. Google
Take note also that as these big tech firms move through time, they are generating massive quantities of cash and buying down their stock float; meanwhile the stock prices are not going up. All this adds up to a future PE ratio quite a bit lower than what might typically be calculated on financial websites.
Which leads to the final point on profitable companies that are currently being ignored. Those big cap tech firms have the largest impact on the calculation of the SP500 itself. If the PE ratios aren’t as high as they appear because of cash and cash-flow generation and buy-backs, then the combined SP500 PE ratio may be lower than it appears.
Next on the list of great companies being ignored, and a sector that should benefit from the re-opening, are medical device companies. Procedures in hospitals are no longer being delayed due to Covid which is benefitting Intuitive Surgical
The lemming crowd has also left traditional credit card companies and even fin-tech companies in the dust this year – despite the fact that some of these companies also have great growth and will benefit from increased travel and spending outside the home as the economy booms. Companies that have underperformed the SP500 thus far in 2021 include Mastercard
Considering that a blind squirrel may in fact find a nut once in a while, the group that the lemmings are getting correct is home builders. This group is still “investment worthy” and is doing well this year with average gains well into the 40%+ area. It makes re-opening sense to continue to focus on Home Depot
If you talk to one of these lemmings, you will definitely get them to light-up over speculative plays like Bitcoin, and the crazy trash stocks listed above. Just don’t talk to them about fundamentals like revenue and earnings growth. Their eyes will glaze over, and they will change the subject to Dogecoin.
Disclosures: Warren Financial has long positions in many of the stocks mentioned in this article for our clients and our own portfolios. We may be starting new long positions in some of these companies in the future. The fact that a company is mentioned is not a recommendation or offer to buy or sell that stock or bond. Investors should always seek advice from an advisor who knows their particular financial situation and not assume that general information such as the information in this article will apply directly to their portfolio. Investing includes the risk of loss.
For more information on how to protect your investments from volatility, enjoy safer-equity, visit www.WarrenFinancial.com and make sure to investigate our Safer-Equity strategies. Warren Financial is an independent RIA firm under SEC regulation. Why do we do what we do? We exist for clients who still believe that investing is the way to build and maintain wealth, and that a customized approach works best for high net worth individuals.