JoAnne Feeney, partner and portfolio manager at Advisors Capital Management

FOCUS: Thematic and dividend stocks

MARKET OUTLOOK:

We see elevated volatility tied to high valuations, greater inflation risks, and the potential for higher corporate and capital gains tax rates. These sources of risk make higher multiple stocks (and broad index funds) particularly vulnerable, but that does not mean investors need to give up on growth. We see appreciation drivers both near term and longer term in specific areas of the market.

First, reopening and recovery mean some banks, insurance, consumer, industrial and energy companies may very well outperform more classic growth companies. And many of those companies also come with attractive dividend yields, good for retired clients looking for income. And some of these companies can provide protection against rising inflation and interest rates. Banks and insurance companies see higher net interest margins as longer-term rates rise. And as economic recovery continues, loan activity picks up and that also contributes to profit growth. Also, we have included international securities to limit exposure to adverse impacts of higher U.S. tax rates, and to gain diversification and exposure to the global recovery.

Second, structural growth drivers remain in place in several areas, and we continue to find some that that are reasonably priced. Selection is especially important given some very high multiples. Major drivers include the ongoing move to digital payments globally, the switch to 5G cellular, the move to EVs, cybersecurity, and housing demand.

Investors also are struggling to see the value of fixed income, given current low rates, but that portfolio component reduces volatility. Average yields may be unattractive, but we are selecting a handful of individual bonds and preferred that provide more than twice the average market yield and keep credit and interest rate risk to a minimum.  

TOP PICKS:

XPO Logistics (XPO NYSE) Most recent addition in Balanced strategy on 5/15/19 at ~$58.50

XPO provides trucking and warehouse logistics services and is seeing continued strength in online retail while it is also now benefiting from a resurgence in industrial and manufacturing activity. We see this driving a very favourable growth outlook for the next few years: average EPS growth of 15-20 per cent and FCF growth of 25-30 per cent. We see its upcoming separation into two companies as further unlocking growth and profitability opportunities.

StoneCo (STNE NASD) Added to our position on 3/29/21 at $59.97

Payments are shifting from cash to digital in Latin America and Stone is the leader in enabling this shift for merchants and consumers. Digital accounts for only 34 per cent of consumption spending in Brazil vs 46 per cent in U.S. and 69 per cent in U.K. Lots of opportunity for Stone to bring more merchants into its network to increase revenue and earnings growth over time. One reason for this to be a top pick now is because the COVID crisis in Brazil has undermined consumer spending over the last several months and the stock has declined sharply. (4Q results missed expectations on that slowdown.) At the same time, Stone has been building its partner network, so is better positioned for growth once that crisis abates.

BioNTech (BNTX NASD) Added to portfolio on 3/25/21 at $95.08

Messenger RNA stock BioNTech is currently benefitting from the stream of positive news on the efficacy of its COVID vaccine, announcements of global adoption, and increases in production and shipments around the world. And while the good news on the vaccine has been appreciated, we selected it more for the future developments using the mRNA platform for cancer and other diseases.  It appears that the world will need booster shots and that improves BioNTech’s cash flow and so resources to invest in other mRNA therapies and supports a faster introduction of new products. Recent talk of waiving patents is raising concerns recently, but the eventual solution is likely to involve compromise since any third party producer cannot just print out the patents and start a production line running. (And that’s even if it could find a way to source all the raw materials, which are currently gating total vaccine production.)

MID-SHOW CHAT:

How should investors position in the face of the current volatility and future risks? More volatility likely to persist from rotation, tax policy, and inflation risks, but global recovery and structural growth provide opportunities:

High multiple stocks are particularly vulnerable… so Index investing holds greater risks because of the dominance of high multiple stocks in the Indices (e.g., S&P 500). Investors need to avoid highly concentrated portfolios after last year. Need to work out of oversized positions with an eye toward tax implications.
Is the market overvalued? Are equities the place to be? Some valuations are too high, but not everywhere. The good news is economic recovery will spread from North America to Europe and South America as vaccinations pickup, so earnings potential is increasing. This makes it a very good time to be in stocks, provided investors are selective.
How should investors be positioned in retirement? Interest rates are low so how do you set up portfolios to deliver income? Investors looking for income can find both dividend yield and potential reopening upside, and be protected from inflation and rotation risks. Banks, insurance, energy, industrials.
And structural growth drivers remain in place (and cheaper opportunities on recent sell offs), but need to find growth at a reasonable price:

Online retail, complex supply chains: XPO vs AMZN?
Housing demand above trend for many years (LEN, WSM, HD, MTG)
Gain some international exposure: Global recovery and digital finance favours some international plays (STNE, SE)
5G in early innings for equipment and applications (NOK, QCOM, TMUS, VZ)

Company Website: www.advisorscapital.com

Other: www.acmwealth.com