JACK: IT WAS ANOTHER WHIPSAW
WEEK ON WALL STREET AND THE
MARKET REACTED TO INFLATION
NEWS, RECESSION FEARS,
IMPENDING RATE HIKES, WHERE
SHOULD INVESTORS PUT THEIR
MONEY?
JOINING BE THE HEAD OF US
EQUITY AND QUANTITATIVE
STRATEGY AT BANK OF AMERICA
SECURITIES, SEVITA SUBRAMANIAN.
LET’S START WITH THE SELLOFF
THIS PAST WEEK.
IS THIS THE BEGINNING OF A LEG
DOWN FOR STOCKS ARE SHOULD
INVESTORS BE BUYING HERE?
>> IN TERMS OF FINDING A MARKET
BOTTOM IT IS A TOUGH QUESTION.
I DON’T THINK WE SHOULD BE
BUYING STOCKS WHOLESALE RIGHT
NOW.
THERE COULD BE MORE VOLATILITY
AS WE DIGEST THE POSITIVE
SURPRISES TO THE INFLATION
DATA, THE IDEA THAT ALL THESE
SUPPLY CHAIN RISKS ARE NOT OVER
YET OR THE FED MIGHT BE MORE
AGGRESSIVE THAN THE AGGRESSIVE
FED WE ARE PENCILING IN TODAY.
THE IDEA IS TO BE SELECTIVE.
A PRECIPITOUS AMOUNT AND GREAT
BUYING OPPORTUNITIES.
SIFT THROUGH THE RUBBLE WITH VISIBLE EARNINGS STREAMS, LOW
VISIBLE EARNINGS STREAMS, LOW
COVERAGE AND LEVERAGE RATIOS.
SOME GEARING TOWARDS INFLATION,
AND BOND YIELDS GROW WITH
INFLATION IN MANY SECTORS,
GRADE INFLATION PLAY.
BUT CONSUMER STOCKS ARE
TYPICALLY HURT RATHER THAN
HELPED BY INFLATION.
JACK: INFLATION, THE FACTORS
YOU WOULD LOOK FOR ARE THE ONES
YOU JUST MENTIONED.
>> THE WAY WE THINK OF THIS IS INSTEAD OF PICKING SECTORS
INSTEAD OF PICKING SECTORS
WHICH ARE ARBITRARILY DEFINED
AS CONSUMER STOCKS BUT ARE
THOSE OR RETAILERS WHICH ALL
BEHAVE DIFFERENTLY.
FACTORS ARE LOOKING FOR
ATTRIBUTES LIKE FREE CASH FLOW
YIELD OR DURATION.
IF YOU PAY TODAY HOW LONG DOES
IT TAKE TO RECOVER YOUR
INVESTMENT.
THOSE ARE AREAS WE FIND THEY
ARE MORE WELL BEHAVED IN
PERIODS OF RISING INTEREST
RATES OR RISING CASH YIELDS.
IF YOU THINK ABOUT WHAT IS
HAPPENING THE FED IS BASICALLY
MOVING CASH FROM 0, 23% OR 4%
OVER A SHORT TIME.
ONE OF MY FAVORITE FACTORS
ALWAYS TO SCREEN FOR STOCKS IS
LOOKING FOR HIGH FREE CASH FLOW
TO LOW ENTERPRISE VALUE OR LOW
FIRM VALUE AND THAT IS THE WAY
TO THINK ABOUT FINDING GOOD
STOCK IDEAS IN AN ENVIRONMENT
WHERE THERE’S A LOT OF DERATING
AND STILETTO POINT WHERE
INFLATION IS GOING TO BE A RISK
AND WE ARE MOVING OFF THE GRID
IN TERMS OF AN ENVIRONMENT OF
SUPER LOW COST OF CAPITAL, EASY
MONETARY POLICY, GLOBALIZATION,
EVERYTHING WE COULD HAVE
DREAMED FOR FOR A TOUGHER SLOG.
JACK: THE BIG CAP GROWTH STOCKS
WERE THE WINNERS YEARS BEFORE
THE FED STARTED HIKING AND YOU
SAY IT IS TIME TO PREFER SMALL
CAPS.
WHY IS THAT?
>> THEM ARE AN INTERESTING
COHORT AND THE OPPOSITE OF WHAT
HAS DONE WELL OVER THE PAST TEN
YEARS.
WE HAD A DISRUPTIVE
DISINFLATIONARY ENVIRONMENT
WHERE THESE THEMES, DISRUPTORS,
TECHNOLOGY, MEGA TECH, LED THE
MARKET.
TODAY WHEN YOU LOOK AT SMALL
AREA, SOME OF THESE COMPANIES
THAT WERE MORE CYCLICAL AND
HAVEN’T HAD A STRONG ECONOMIC
RECOVERY AND BENEFIT FROM
HIGHER US GDP GROWTH.
WHEN COMPANIES TELL US WHAT
THEY ARE GOING TO DO A LOT OF
BIG GLOBAL COMPANIES ARE
CHANGING THEIR SUPPLY CHAINS
BACK TO THE US, WHAT DOES THAT
MEAN?
WE ARE IN FOR A REAL CYCLE
AFTER MANY YEARS OF CORPORATE
UNDER INVESTING AND US GDP
GROWTH WILL BE BETTER THAN REST
OF WORLD GDP GROWTH.
IN THAT ENVIRONMENT WE THINK
SMALLER COMPANIES COULD BENEFIT
LIKE THEY TYPICALLY DO FROM
THESE BIG CYCLES.
FURTHERMORE WHEN YOU LOOK AT
THE VALUATION, THEY ARE TRADING
DIRT CHEAP, TRADING AT RECORD
DISCOUNT TO LARGE-CAP WHERE
THEY TRADE AT A PREMIUM SO OUR
VIEW IS THEY ARE PRICING IN MORE RECESSION AND DOWNTURN
MORE RECESSION AND DOWNTURN
RISK THAN LARGER COMPANIES.
JACK: IS A GOOD IDEA TO BUY
ENERGY STOCKS OR IS THERE A
BETTER WAY TO GET ENERGY
EXPOSURE LIKE INDUSTRIALS?
>> NOBODY OWNS ENERGY OUT
RIGHT.
THE QUESTION WE GET FROM
CLIENTS IS HOW CAN WE OWN
ENERGY WITHOUT EARNING ENERGY?
ENERGY IS 30% UNDERWEIGHT IN
THE AVERAGE MUTUAL FUND, THE