Trader on the New York Stock Exchange.
The market is swirling at record levels as Covid fears mount 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, along with Scott Wapner, interviewed Bill Nygren of Oakmark on CNBC’s “Mid Term Report”. We shared our strategies for navigating a market that was closing at a record high. CNBC’s chief economic reporter Steve Liesman also shared his investor survey, which highlighted inflation fears and investor caution.
Just when it looked like a Covid resurgence, rising prices and political uncertainties were taking the wind out of investors’ sails, stocks continued to hit new highs.
From ample capital and liquidity to soaring corporate profits, there are many basic reasons why stocks are up nearly 18% since the start of the year. The ever-present question for investors is, “What’s next?” Frustratingly, the ubiquitous answer is “nobody knows”. Taking a sensible, rational course when there is heightened uncertainty is the primary goal of every successful investor.
The market is expensive, but in the “Mid Term Review” I mentioned five stocks that I would buy with new money today. They appear at the end of this article.
The companies are a mix of value and growth and operate in four different industrial sectors. What they all have in common is that they have dynamic management teams that have been proven to adapt to change.
Make no mistake, the US economic recovery has been robust well beyond the wildest expectations. Even if future growth could be a little slower than in the last few quarters, the economy is still looking to expand.
Certainly there are multiple 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 dodge. I often describe myself as a very concerned optimist. Our responsibility is to find the most prudent and sensible way to prosper our customers. We do that.
The S&P 500 closed on Tuesday – and again Thursday – on a new record as Steve Liesman’s economic survey showed that only 32% of respondents think now is a good time to buy stocks. This is what the pros call the “opposing indicator”. While this appears to be a data point that would suggest caution, it is a sign that the bull market may have to run further.
The reason for this is that low investor sentiment means there is still a large pool of potential future buyers who are not yet convinced of the attractiveness of the market. On the other hand, when investor sentiment is high, most investors have already voted with their money, leaving few potential converts to take the market to the next level.
Emotions are the enemy of the long-term investor. Our dispassionate discipline and persistent research will continue to illuminate us and guide our way forward. As they say on the other side of the pond: “Keep calm and carry on!”
Dates from August 3rd
Visa (V – $ 237.09)
Performance since the beginning of the year: + 8%
Market Cap: $ 520 billion
Forward rate gain (CY2022): ~ 31x
Dividend yield: 0.5%
Projected 5-year growth rate: 15%
Visa is a game of recreation given the importance of travel and cross-border transactions to overall business. Most of Visa’s travel commitment is on the consumer (rather than the commercial) side, 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 replacing cash with plastic.
Truist Financial (TFC – $ 55.31)
Performance since the beginning of the year: + 15%, but around 12% less than in May
Market Cap: $ 73 billion
Forward rate gain (CY 2022) ~ 11x
Price / book: 1.2x; Price / manual 2.1x (based on 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 good prospects for cost and income synergies from the merger of SunTrust and BB&T.
CVS health (CV – $ 84.00)
Performance since the beginning of the year: + 23%, but 7% less than in May
Market Cap: $ 110 billion
Forward rate gain (CY 2022) ~ 10x
Dividend yield: 2.4%
Projected 5-year growth: 10%
CVS is trading at a very attractive valuation. The merger with Aetna was a very complicated story that tended to be ignored by the markets, resulting in frustrating results over the past two years. However, we believe the CVS management team is forward-thinking about healthcare and next generation delivery, and we believe CVS is only just beginning to reward the patient investor.
Valmont Industries (VMI – $ 237.89)
Year-to-date performance: + 36%, but ~ 10% less than in May
Market Cap: $ 5 billion
Forward rate gain (CY 2022) ~ 19x
Dividend yield: 0.8%
Projected 5-year growth: 10%
Valmont is an infrastructure company with exposure to power generation and transmission, wireless telecommunications, transportation and agriculture, and other end markets. The company is also active in some areas with more long-term growth prospects, such as AI-powered irrigation equipment and renewable energy. The company should benefit from an extensive infrastructure package, but management has proven over the past four years that it can work even if “Infrastructure Week” does not come.
FedEx Corp (FDX – $ 280.81)
Year-to-date performance: + 8%, but ~ 12% less than in May
Market Cap: $ 75 billion
Forward rate gain (CY2022) ~ 12x
Dividend yield: 1.1%
Projected 5-year growth: 12%
The stock has pulled back as management cites labor shortages and wage pressures while also forecasting a 22% increase in capital expenditures in fiscal 2022, which is better than expected, and e-commerce is a good issue. Management has proven adept at assessing the business environment and has shown a willingness to invest and put the company in the best position to mitigate threats and maximize opportunities.
—Michael K. Farr is a CNBC employee and the President and CEO of Farr, Miller and Washington.