The market is ignoring these 3 “best in class cyclical businesses,” giving investors a good buying opportunity.
Stocks have been on a wild ride this week as investors reacted to a resurgence in coronavirus cases, with the U.S. seeing record highs of new cases of the deadly virus two days in a row.
Up days followed by down days followed by up days, or what Evercore ISI analyst Dennis DeBusschere dubbed as “violently flat markets” on Wednesday. And such volatility should continue.
National Secutities’ Art Hogan warned late last week that the volatility we’ve seen in the market recently will continue on for at least the next couple of weeks.
“The fear of the unknown catches more volatility than anything,” Hogan said. “Volatility is going to tick up a bit into summertime.”
It’s no wonder then that investors are shifting into value stocks.
And three such stocks are “on sale” now according to Latitude Investment Management CEO Freddie Lait.
Lait said this week that “best in class cyclical businesses” JPMorgan (NYSE: JPM), Texas Instruments (NASDAQ: TXN), and L’Air Liquide (OTC: AIQUY) are being largely ignored by the market.
“JPMorgan is a highly cyclical business, but I believe a best in class quality business,” Lait said, adding that semiconductor manufacturer Texas Instruments and industrial gases company L’Air Liquide also fit the bill.
“These businesses are very high quality even if they are tied to economic cycles, and they are on sale at the moment, so you can buy these market leaders and merge them in a portfolio effect with some of the technology and health care market leaders that everybody else owns,” Lait added. “You end up with an aggregate P/E that is substantially lower than the market, but with similar sort of growth rates and a great balance to the portfolio if interest rates do move or if you see a value-cyclical rotation or anything like that, which eases your pressure in terms of taking single bets on the market.”
Hogan added that having a plan is more important now more than ever.
“Have a plan, stick to it, and have balance in the equity portion of your portfolio. Sticking to your plan is one of the best things you can do right now,” Hogan said. “That cyclical part will actually do well as the economy picks up. That balanced approach, I think, is going to be a great portfolio to have for the next 12 to 18 months.”
As for the rest of the market, Lait expects corporate earnings to fall roughly 35% in 2020, and while they’ll edge up next year, they’ll remain below 2019 levels. Lait said, however, that aggregate earnings per share in his flagship Latitude Horizon Fund will be higher in 2021 than in 2019. The portfolio—which holds Google-parent Alphabet (NASDAQ: GOOGL, GOOG) and Visa (NYSE: V)—remains inexpensive at an average valuation multiple of 15.5x P/E in 2021.
“The investment style that has been working for the last decade has continued to work for the last few months and that is buying quality growth stocks, defensive growth stocks,” Laid added.