Buying opportunities abound, even though the market is trading at record highs

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New York Stock Exchange traders.

Source: NYSE

The market is spinning at record highs as Covid fears escalate 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 Bill Nygren of Oakmark. We shared our strategies for navigating a market that closed at an all time high. Steve Liesman, CNBC’s senior economics reporter, also shared his investor survey, which highlighted inflation fears and investor caution.

Just as it looked like a Covid resurgence, rising prices and political uncertainties were going to take investors’ breath away, stocks continued to hit new highs.

From plentiful capital and cash to surging corporate earnings, there are many fundamental reasons why stocks have risen nearly 18% year-to-date. The ubiquitous question for investors is “what’s next?” Frustratingly, the ubiquitous answer is “nobody knows.” Charting a reasonable and rational course despite increased uncertainty is the primary goal of any 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.

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 a proven track record in adapting to change.

Make no mistake, the US economic recovery has been robust far beyond the wildest expectations. While future growth may be at a somewhat slower pace than in the past two quarters, the economy appears on track to continue expanding.

Certainly, 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, and more. But there are always potential landmines to avoid. I often describe myself as a very worried optimist. Our responsibility is to find the most prudent and reasonable path to the prosperity of our customers. We are doing it.

The S&P 500 closed at a new high on Tuesday – and again on Thursday – as Steve Liesman’s economic survey showed that only 32% of those polled think it’s time to buy stocks. This is what the pros call an “contrary indicator”. While this appears to be a cautious data point, it is a sign that the bull market may still have some way to go.

The reason is that the low investor sentiment readings mean that there are still a large number of potential future buyers who are still not convinced of the attractiveness of the market. In contrast, when investor sentiment is high, most investors have already voted with their money, leaving few potential converts to drive the market up on its next step.

Emotion is the enemy of the long-term investor. Our impartial discipline and relentless research will continue to inform and guide our way forward. As they say on the other side of the pond: “Keep calm and carry on!”

Data as of August 3

Visa (V – $ 237.09)
Cumulative performance: + 8%
Market capitalization: $ 520 billion
Price-earnings at term (CY2022): ~ 31x
Dividend yield: 0.5%
Growth rate projected over 5 years: 15%

Visa is a recovery game 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 business travel), and we expect consumer travel to return to historic levels faster than business travel. Visa is also well positioned to benefit from a long-term trend of moving cash to plastic, a trend that accelerated during Covid and we believe it will continue to benefit Visa in the longer term.

Truist Financial (TFC – $ 55.31)
Year-to-date performance: 15%, but down around 12% from May high
Market capitalization: $ 73 billion
Futures price-earnings (CY 2022) ~ 11x
Price / book: 1.2x; 2.1x tangible price / pound (based on Farr, Miller and Washington analysis)
Dividend yield: 3.5%
Growth projected over 5 years: 8% to 9%

It is a high quality, conservative bank with diversified income streams and strong prospects for expense and income synergies through the merger of SunTrust and BB&T.

CVS Health (CVS – $ 84.00)
Year-to-date performance: 23%, but down 7% from May high
Market capitalization: $ 110 billion
Futures price-earnings (CY 2022) ~ 10x
Dividend yield: 2.4%
Growth projected over 5 years: 10%

CVS is trading at a very attractive valuation. The Aetna merger has been a very complicated story and one that the markets have tended to ignore, resulting in frustrating performances for much of the past two years. However, we believe the CVS leadership team is forward-thinking in delivering healthcare services and delivery for the next generation, and we believe CVS is just beginning to reward the patient investor.

Valmont Industries (VMI – $ 237.89)
Year-to-date performance: + 36%, but down around 10% from May high
Market capitalization: $ 5 billion
Futures price-earnings (CY 2022) ~ 19x
Dividend yield: 0.8%
Growth projected over 5 years: 10%

Valmont is an infrastructure game, with exposure to power generation and transmission, wireless telecommunications, transportation and agriculture, among other end markets. The company is also getting more involved in certain areas with more secular growth prospects, such as irrigation equipment compatible with AI and renewable energies. The company should benefit from a full-scale infrastructure package, but management has proven over the past four years that it can run even if “infrastructure week” never comes.

FedEx Corp (FDX – $ 280.81)
Year-to-date performance: + 8%, but down around 12% from May high
Market capitalization: $ 75 billion
Futures price-earnings (CY2022) ~ 12x
Dividend yield: 1.1%
Growth projected over 5 years: 12%

The stock fell as management reported labor shortages and wage pressures while forecasting a larger-than-expected 22% increase in capital spending in its 2022 fiscal year. the problem of excessive demand resulting from a massive increase in e-commerce is a good problem to have. Management has proven adept at assessing the business environment and has shown a willingness to invest and place the business in the best position to mitigate threats and maximize opportunities.

Michael K. Farr is a CNBC contributor and President and CEO of Farr, Miller and Washington.


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