First off, there was no note this Monday as I was at the 43rd Raymond James Institutional Investor Conference (Monday – Wednesday). This event was cancelled for Covid the past two years, so it was great to be face to face again. This conference is different to many others in that you actually do something. I’ve been to many over the years which act more as a rewards trip with the benefit of learning something should you wish to. This one had hundreds of company CEOs and CFOs…of which we own a number. In person where we heard business strategy, revenue and profit guidance, and the ability to ask questions directly to the people driving the results. This is a rare opportunity unless you’re prepared to travel to every company’s investor day.
The days were packed, along with my notepad from the amount of notes that I’d written, and now I have the job pf correlating that into the construction of the portfolios. Overall, I will say the majority of respondents are still seeing strong consumer demand, maintaining higher than normal margins and were bullish on their growth prospects and ability to hit profit forecasts.
In particular the home builders (whose stocks have been beaten lately and are historically cheap) stated severe imbalances in the housing market is causing tremendous demand. Inventory of ready to move in homes continues to diminish, resulting in consumers having to pay higher prices which will ultimately flow through to profits of these organizations.
17 banks participated in the conference. Banks being rate sensitive (meaning the higher rates go the better off banks are – remember they borrow short and loan long, and profit the difference), are positioned to do well as economic conditions normalize. Loan growth overall is strong and although labor costs will increase, bank are unlikely to struggle to maintain headcount. The bank index is holding up very well in this market correction being down a bit over 4% YTD against the S&P 500 11%.
The Leisure industry, think anything other than vacations. (So, throw out cruise-liners, airlines, and hotels), think more like boats and sporting equipment and the companies that sell and manufacture them, is still seeing strong demand. You would think that given the uncertainty in the world at the moment, along with higher gas prices that there would be some evidence of slowing receipts in the past week or so. However, all of the management teams that were asked these questions stated that they have not yet seen any slow down in orders, and in relation to the big-ticket items, they have a 12-24 month backlog of orders anyway, so a slow down would help them catch up and still allow them to hit or exceed guidance numbers.
The areas of concern in my mind were companies that rely on fuel to operate, with the exception of transportation companies that have fuel surge charges that can be billed directly to the customer. Airlines and cruises will struggle to do this and a higher for longer gas price will force them to accelerate new aircraft purchases being that the new ones will be more fuel efficient.
But overall, there was a positive vibe coming from most of the companies presenting, despite the current geopolitical climate. Two things to consider here:
- It all comes back to earnings in the long run. I place so much emphasis on companies profit forecast and management’s ability to deliver on it, and that’s why this conference was so important to me. Remember, the street is trying to forecast what earnings will be in the future and that’s why you get some crazy day to day movements based on headlines. Ultimately though we will find out in the future if we met these earnings forecasts and that’s what’s called Fundamental analysis.
- No CEO is going to come to an investor conference and tell you his/her company sucks. In most, if not all cases, their compensation package is tied to the company stock. That’s why you need to look past what they say and look at their track record of meeting or exceeding their forecasts and ask the tough questions to see how much of what they are presenting needs to be relied upon. This is the best part of investing in individual securities. You make an assumption based on what management says, and then you get to measure whether or not they are worthy of your investment.
Now back to where we are today…..
It’s been like watching a vertical tennis match. Up/down/up/down, unfortunately this point is not over yet, the (tennis) rally will continue. Even if we get a cease fire here in the coming days (which I think is highly unlikely), the market will be looking at the Fed attempting to measure how impactful rate hikes will be on this economy, still wrestling with a supply choke, and an approaching mid-term. Sure, you may well get a big pop in the indexes should we see some form of cease fire however I don’t think it will dampen volatility for a while.
Good news for all of this is the second half of the year is setting up nicely. For one, my buy/sell sheet is now in buy territory for the first time since Covid hit, predictions are high that the Republicans will take back the house, (don’t misread this as a political statement, I hate all the politics equally) which will cause gridlock meaning nothing meaningful will get passed, which the market loves. We will see what earnings look like for the 1st and 2nd quarter of this year (which I think will be great again), and multiples on the market are coming back towards normalized levels. This along with the 3rd year of a President’s term is positive 89% of the time.
Shorter term, we are about to see a “death cross” in the S&P 500 which is where the 50 moving average crosses the 200-day on the way down. This is viewed by technicians (people who read charts) as a bearish sign.
I on the other hand look at it as a good entry point. It’s really difficult to pick a bottom in a correction or a bear market. But as you can see from the past two times that we saw a death cross in the S&P 500, selling on the death cross coincided with a near bottom.
2008 and 2000 were very different. If you would’ve sold on the death cross and purchased back in on the golden cross you would’ve been very happy.
However, they were what I would classify as classic recessionary bear markets. When I say classic, I mean caused by euphoria, not a pandemic or an idiot Chairman of the Fed. A classic bear market by my terminology is caused by all of us over inflating an asset class and/or sector, by chasing the hot money and FOMO (fear of missing out) is the dominant driver of investment decisions.
I know I’ve given you a lot of data this week, I tend to ramble when I get excited. And yes, I’m excited. It’s been a while since I’ve looked at a company and thought that their stock was undervalued. Now I’m seeing quite a bit of it. These pullbacks drag the good stocks down with the bad and that’s what supplies the opportunities in this business. Remember I’m investing for your life expectancy and/or legacy. We could indeed go down further from here and I’ll be paying close attention to the crazy Putin. It’s likely Europe will end up in a recession, but unlikely that we will. The images and loss of life is tragic, and as this conflict continues, I’m sure we will see much more graphic images of devastation. Whether we like it or not, the market has no emotion and will continue to do its thing.
With that said, here’s the buy sell.
Mick Graham, CPM®, AIF®
Branch Manager Raymond James
Financial Advisor Melbourne, FL
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