Value, Small Cap, Cheap Tech, Home Builder

Turning to unloved sectors

idea:
To leverage new capital, I like to think about unpopular sectors of the market. We are in a mature stage where we are growing faster than our value. Growth and value comparisons tend to overperform and underperform in 10-15 or 10-20 year cycles. Against this background, I have three ideas: blue-chip value stocks, small-cap stocks, and Japan.

strategy:
By value, we mean circular sectors such as energy, finance, materials, and utilities. Quality value means looking for companies with balance sheets that aren't overleveraged, competitive advantages, still growing earnings, and a higher dividend yield than the S&P 500 (about 1.5%). means. If inflation persists, value should also perform well.

The small-cap space carries more risk than quality value. The company may not be as tested and its earnings may not be as stable as well. But it's the same generalization. Small- and large-cap stocks have gone through a violent 15-year cycle, and the trend of large-cap stocks outperforming small-cap stocks could be reversed. Valuations are at relatively low levels in 30 years, and stocks are more tied to the strong U.S. economy, making them more insulated from geopolitics.

Japan has been in a world of deflation for 30 years. We have inflation right now, but it's a good kind of inflation. Some inflation is necessary because it encourages businesses to invest now rather than later. Another big change is that the Tokyo Stock Exchange is forcing companies to increase their return on equity to shareholders, and corporate governance models are now of higher quality than before. Japan is doing very well and I think it will take another two to three years.

The big picture:
Investors should generally feel comfortable sticking with stocks. The US economy is fairly strong and has weathered rising interest rates well. It's important for investors to accept this and accept the fact that the only difficult part of this equation is inflation. The hope is that the Fed can address this issue, and the market expects the Fed to cut interest rates. My big warning to my clients is that this may not be the case. That doesn't mean it's a disaster in terms of investments, but it does mean we need to be mindful of concerns about inflation rising over time.

value play

idea:
At Precilium, we employ a rebalancing strategy that adds capital to areas that are behind the market and may present better opportunities for our clients. After rebalancing to growth stocks in late 2022, we are now buying more value stocks to take advantage of their attractive valuations. We rebalance our client accounts every time the S&P 500 moves up or down by 5%, and we are very happy with the results.

strategy:
The S&P 500 has a relatively high price-to-earnings ratio of approximately 23 times, but as of January 31, the Vanguard Value ETF (VTV) and Vanguard Mid-Cap Value ETF (VOE) had a P/E ratio of approximately 17 times. The Vanguard Small Cap Value ETF (VBR) has a P/E ratio of approximately 12x. The companies in these ETFs invest in each of them because they believe they are poised to be the next area to outperform.

The big picture:
The US unemployment rate has now been below 4% for more than two years. This means that U.S. employees have had time to become familiar with their roles and become more effective. Add in the introduction of AI into daily life, and the combination should lead to increased productivity and profitability. We remain optimistic that this will continue to drive the stock higher.

Pursue long-term growth

idea:
It is possible to invest in growth stocks even in a wide range of industries. [valuations] Given the limitations, we look for stocks with non-nosebleed valuations that still have attractive earnings growth potential, strong balance sheets, and plenty of cash generation.

strategy:
As long-term investors, we always balance the potential for short-term gains with those with the potential for sustained returns over the long term. Examples of recent portfolio additions include:

• eBay (EBAY) is an unloved high-growth company that trades at just 10x revenue despite having software-like profit margins. The company is currently placing greater emphasis on profitability and shareholder returns.
• ASE Technology Holding is a key player in the semiconductor supply chain. The Taiwanese stock holds American Depositary Receipts in the United States with the ticker ASX. The company provides packaging and testing services, the final stage of semiconductor manufacturing. The stock trades at just 14 times forward earnings, benefiting from a rapid recovery in semiconductor production as manufacturers scramble to supply the AI ​​arms race.
• Applied Materials (AMAT) is an affordable, high-quality producer with attractive revenue growth while benefiting from tailwinds in AI chip demand. AMAT is another key player in the semiconductor supply chain, providing essential equipment used to manufacture advanced chips. The company currently trades at a forward P/E of 23x, and is a healthy capital-light company with a premium free cash flow yield and a return on invested capital of over 30%.

The big picture:
In today's market, it's clear that fast-growth and tech stocks have short-term momentum, but valuations are stretched, positioning is crowded, and once momentum shifts, factors that impact medium-term returns This is often the case.

Change jobs to a home builder

idea:
We think there are some interesting opportunities for home builders. From a valuation perspective, it's still quite cheap, with some companies having single-digit price-to-earnings ratios.

strategy:
Supply in the housing market remains tight. If you look at inventory, the industry has three to four months' worth of inventory, which is a far cry from the usual seven months' worth of inventory. And demographics remain supportive. It's the Millennial generation, and the rate of household formation among this generation is at a record high. If you're in your early 30s, you're probably making a decent salary, want to get married and start a family, and want to move out of your apartment or family home. From a demographic perspective, this is a very large part of what is likely to drive the housing market for at least the next few years. The combination of millennial demand and scarce supply leaves the housing market in pretty good shape.

If you look at the SPDR S&P Home Builders ETF, it includes big names like DR Horton, Lennar, Pulte, and Toll Brothers, and its basket of stocks has a P/E ratio of 13x. They trade at a deep discount to the broader market, where the S&P 500 trades at nearly 20 times forward P/E.

The big picture:
Housing is said to be “expensive,” but the most important thing to remember when considering where the word “expensive” is used is that it is determined by the monthly payment amount. It's relative, but you might want to consider buying something more modest. If interest rates are high, you can buy more home as interest rates go down. We believe the Fed needs to hit its inflation target by the end of the summer. That would allow the Fed to cut rates three to four times by the end of the year, leading to lower mortgage rates.

Research small-cap stocks

idea:
Small-cap value stocks historically tend to appreciate the most at this point in the cycle, so they're a useful addition to many portfolios. But the next tier of AI beneficiaries that could hold the clearest winners lies in the growing space of small-cap stocks.

strategy:
Without a doubt, 2023 was the year of mega-growth stocks, as evidenced by the leadership of the Magnificent 7 (and then some). Their performance caused the rest of the S&P 500 index to retreat, but therein lies the opportunity. These stocks delivered reliable returns, but more critically, investors saw them as the go-to beneficiaries of the generative AI boom. Unfortunately, we were unable to demonstrate our strength in terms of profits. The S&P top 10 stocks accounted for nearly a third of the index, but contributed less than a quarter to its earnings.

Software-as-a-service companies that can dramatically improve productivity stand out in small-cap growth, as do companies that address one of the most critical needs of our time: cybersecurity. However, unfortunately this topic does not seem to be making any progress. and who is the chief information officer's top priority for the foreseeable future.

The big picture:
Historically, stock price returns tend to precede earnings growth, and earnings growth tends to occur before economic performance. At this point in the cycle, small- and mid-cap stocks are likely to drive stocks, especially as we await strong economic growth in late 2024 and early 2025.