How to Use Cash in the Bank to Tackle Inflation: Jarvis® Update October 14, 2022

Inflation continues to drive most market narratives. Is there anything investors can do in this market? We tackle this question much more in this week's Jarvis Update. I'm your host, Brian Dress, director of research here at Left Brain, joined as always by our CEO and chief investment officer, Nolan Langford. Nolan, welcome to the program.

Thank you. It's great to be here. We have Thursday Night Football tonight featuring the Chicago Bears. Should be a good one.

Yeah, sorry for all the fans have to watch that one. A quick preview for everyone. Markets were down again, not as much as it felt like with the volatility. Of course, two topics that we're going to cover as we usually do. First is what investments we want to avoid as investors. And then second, where can we put cash in the bank to deal with inflation? Before we get started, a few announcements. First of all, we produce this show for you, the individual investor, whether you have a 401(k) or an IRA. If you work with an advisor or you handle your own investments, we'd love to be a resource for you. If you want a second opinion on your positioning in your portfolio and you want to talk about opportunities that we see in fixed income securities, make sure to call the number down below. Love to have a conversation with you and be a resource. Also, if you're an institutional investor, we've got something for you as well. That's our research service, Left Brain Investment Research. That's 8 to 10 full-length stock reports every month. And also The Chosen, which is our favorite bond and favorite stock opportunity each month. And that's going to be coming out this weekend. So if you're interested, click the link below. Either way, we'd love to have you sign up for our biweekly newsletter. We're on this week with the newsletter. Follow the link below if you want to get on our mailing list to receive our investment content every week in your inbox every Saturday morning. And finally, if you find the video useful, please like and share. It helps other investors find it. And of course hit the subscribe button and click the button for notifications. You want to receive notification each time the videos come out and we're out every Friday morning with these videos. Let's jump right into the market recap. So the 3 indexes we follow were all down this week. S&P was down roughly 2%. Nasdaq brought up the rear with a 3.8% fall. And then the small-cap Russell Index was down 1.4%. Again, we keep seeing the outperformance in Russell. Uh, we're going to continue to note that and actually discuss that a little bit later in the video. Inflation data definitely dominated the headlines this week. Consumer Price Index and the Producer Price Index were also— were both released. They were both up more than 8% on a year-over-year basis. So inflation continues to be a big story. And then of course the Federal Reserve's quest to tamp down inflation, a secondary story, but that's driving everything in markets. Speaking of interest rates, 10-year Treasuries continue to flirt with 4%. and that's driving the price of all securities. We'll get to that in the first topic. Uh, Nolan, with all that in mind, what are your initial thoughts on this week's action?

You know, it's— we generally do these recordings, it's about 15 minutes or so, and my goodness, when you brought up the list of topics that we're following this week, that wasn't even half of them. We didn't mention what was happening over in the UK, which has really been driving our activity here. Uh, we didn't mention China. Uh, which also has an outside influence on what's happening here economically. And the one that you mentioned that really stood out to me was the small caps, especially in light of a name we're going to talk about at the end of the show. And tomorrow starts the banks, uh, so we'll get to hear financially how the banks are doing. Of course, we heard that really negative news from Jamie Dimon and JPMorgan Chase. It really spooked the market earlier this week and late last week. But the banks actually report earnings tomorrow, so it'll be interesting to see how they're doing. And next week we're calling the week of tech or the week of the QQQs. There's all the big household tech names. A lot of them report next week, including Apple, Google, Microsoft, Meta. So it'll be interesting to hear how, how that category is doing as well. And more importantly, how investors respond.

Certainly plenty to look forward to. We don't really have high expectations for those tech earnings. But we'll see if they can clear a low bar. Let's jump right into our topics. So topic 1, we're just calling what to avoid. As we look at the year so far, many of the best-performing stocks in both 2020 and 2021 continue to lead the markets lower. We mentioned a few of those— Microsoft, Apple, and a few others. No end appears to be in sight on that score. Um, the Federal Reserve continues to step on the gas trying to tamp down inflation by raising rates. Uh, looks like they're going to be raising rates another 0.75% next meeting. And if not, it'll be 100. Correlation between the software index, that's IGV, we'll put up a chart of that. And also interest rates is 1 to 1 almost. So what we're seeing is higher interest rates means lower prices in software stocks. That's con— that theme continues to play out as we move to the end of 2022. And here at Left Brain, we've sold a number of stocks that we previously really liked, and it's been a difficult decision. And I know investors out there are also facing difficult decisions on a number of their positions. With all that, all being said, Nolan, how should investors be handling things in the current environment and what should they be avoiding?

I think this is tricky. I think it's especially tricky for those investing at work or through their former employer with a 401(k) plan. We don't think the choices there are great. You have mutual funds which are very broad-based. And so there you have to make a micro guess on what area you think is going to perform going forward. And if you have bond funds that you're positioning yourself in, there's few things that we like less. They're the ultimate interest rate sensitive vehicle, and they're going in the wrong direction, and there's not a lot of hope in sight. I would say there are certain sectors that we're really, really cautious on. First, let's start with technology and just talk chips. Uh, every technology semiconductor that have come out pretty much universally has done a guide down It's a really rough area for investments now, not only with the supply chain issues, but the PC market really has not done very much. The handset market's been weak. You have inventory oversupply, and it's a really rough area for investment right now. Even a poster child for semis, which is Intel, which is probably a generation or two behind on their technology, it's been a really rough go for semiconductors and not likely to get better anytime soon.

There seems to be plenty to avoid out there. We've preached for a while now, you know, underweighting tech seems to be a sensible strategy. We like overweight in energy, healthcare, and insurance. And as we move to topic 2, we'll talk a little bit more about the positive side of the equation. What should investors be moving toward? Move right to topic 2. So topic 2, we're calling Cash in the Bank: Keeping Up with Inflation. So obviously bonds and stocks have both fallen precipitously in 2022, but at the same time, the price of goods, goods and services continues to move higher. So it's a conundrum for folks who are invested because investments keep going down and the price of everything they're buying is going up. So something we've got to deal with here. We continue to tell investors we love opportunities in the fixed income markets, but like Nolan said, not in bond funds, but in individual bonds and individual securities. And also, we would note high dividend securities in stocks, both mortgage REITs, business development companies, and even pipelines have been selling off indiscriminately since we had that problem in the UK, uh, with the banking system and the pension funds. Nolan, it's a big question for folks that have cash in the bank. What's the best way for investors to deploy those, those funds in the bank and try to keep up with inflation?

There's a range of securities that are income-bearing that really are lighting up the screen on our end. For the first time in years I can remember, we've actually bought clients here CDs, 1-year CDs that are yielding close to 4%. It's been the first time in a very long time that I can remember doing it. Stepping out from CDs, we really like the fixed income bond market. And I know reflexively people are thinking, well, if interest rates go up, doesn't that hurt bond prices? That is true. And that's what's happened so far, which creates the opportunity. And like you and I have often remarked here, we think CFOs did an unbelievable job in 2020. 2020, the Federal Reserve Board lowered interest rates here in the US to zero. We were all locked down because of COVID and the economy really was on life support. And so they really didn't have any choice. So Jerome Powell and crew, uh, lowered interest rates to zero and corporate CFOs got busy issuing all type of debts based off of those 0% interest rates. So now there's really, hundreds of billions of bonds that trade today with these very low coupons because they were issued with 0% rates for a while. So you're finding these bonds in our database, you know, 1.5% coupons up to 2.5% coupons. And because they're not paying very much, uh, the price or the value of the bond is down and down a lot. And it creates this interesting opportunity. These are obviously high-quality companies, uh, investment-grade companies, So, you're not really worried about getting repaid. It's more of an interest rate story. If the 10-year Treasury is yielding 4%, any corporate bond that I have is going to have to yield more than 4% to compensate me for the extra risk. So, for the first time in recent memory, we're finding very high-quality bonds, 6%, 7%. And then this week in the Jarvis Letter, I think you're going to write up a bond that we really, really like. It's investment grade, really good earnings, and it's approaching 8%. So a lot to like there.

Not a lot of investors have access to individual bonds. That's something that's our bread and butter. If you want to learn more about how you can get invested in individual bonds and whether it might be suitable for you, definitely get in touch with us. We'd love to have a conversation with you and teach you a little bit more about what we're seeing out there. On the other side of the coin, Nolan, stocks— obviously stocks are down a lot. We're talking to clients, a lot of them still haven't given up on hope on stocks, are looking for bargains out there. As far as stocks go, kind of where are you looking?

So there is things to like in stocks. It isn't universal where you can just sort of pick any stock and expect to do well, but the premier companies, uh, are still performing. And we think there's a lot of money to be made on the other side of this. It's much easier to spot the superior businesses now because there's fewer of them. Um, we're going to highlight a company here at the end where they reported a good number for earnings that are going to be released next week. The stock shot up more than 10% on the day. So that tells you that investors are still reacting positively to positive news, which is good. We also got good news this week. A blue chip, Pepsi, actually, uh, reported really good numbers earlier this week. The stock had really good gains, uh, yesterday and held those gains today. And so it's good to see that companies are, are, the market's still responding favorably to really good results.

It's interesting you mentioned Pepsi, Nolan. Uh, we're noticing a lot of these staples companies, they've been down quite a bit this year. Usually you would think defensive, uh, stocks like that would do well in this environment. They haven't so far. It's been an inflation story, but these companies have pricing power like Pepsi. On the other hand, their expenses are going down because commodity prices are starting to fall. so their inputs are going down. So it looks like margin expansion is the story behind a lot of these staple stocks. We also, like we mentioned at the, at the top of the show, and we've mentioned for a number of weeks, maybe months now, small and mid-caps continue to outperform the broader market. And, uh, it's really something worth noting. Uh, it's not, we're not really sure exactly why. Is it the dollar being strong and they don't have outside of the US exposures? But it is clear that there's outperformance in small and mid-caps. There's one stock that Nolan alluded to and we want to talk a little bit more about it. We've talked about it before in the newsletter, but we'll talk about it again because if you haven't, haven't heard of it, you definitely should check it out. Can you share that stock with the viewers, Nolan, and tell us a little bit more about the story there?

Yeah, the stock is called InMode. The ticker is INMD. Uh, it's a real— it's Israeli-based med technology company, and basically they're involved in the aesthetics market. So if you go in and get any body sculpting, face lifting, or anything like that, typically you'd, you'd go under the knife and you'd have some sort of cosmetic surgery, but they build these devices using radio frequency. So it's non-invasive way to get body sculpting. Uh, and it's an area that has held up extraordinarily well. Margins are high at 80% plus. It's a smaller cap company. The market cap's about $2 billion. But they generate a lot of cash. They don't have debt. There's about $400 million of cash on the balance sheet. Earnings are growing well in excess of 30% a year. And you can get all of this at a PE of below 20, which is a price earnings ratio, which we find very attractive for an expanding market and for a business that's generating a lot of cash with low valuation.

We love the numbers on InMode. We also love betting on the vanity of the US consumer. Uh, that never seems to go out of style, whether in a recession or an expansion. So that's positive. Again, it's a small cap. We think there's a lot of opportunities in small caps. So definitely take a look at InMode. And again, we're building a list of companies just like InMode. Uh, like Nolan said, when the tide goes out, we see a recession, it becomes a little bit more stark. The companies that actually are doing well, and this is one of them, uh, we're building our list. We've got a handful and we're gonna continue to look for more of those. It's only going to take a few of those, uh, find a way to bring that portfolio back when the selling does finally stop. So that all said, Nolan, thank you for being with us. Thanks to the viewers. Any last thoughts before we bid adieu to the viewers?

Yeah, so another area of strength is travel. Uh, we've seen really good numbers from the cruise lines earlier this week, and just today we've seen good numbers from Delta as well. So travel is another area that's holding up. And then finally, you know, we have a man crush on energy. So it'll be interesting to see. There was a correction in energy stocks going back to June. They bottomed and started to rally again. Oil prices are back below $100 a barrel. But within energy, there's a subsector that we really, really like, which is the pipeline story. So there you get low valuations, but you get very high dividends of 7% plus in most cases. You have assets that are backing the company. And within pipelines, we like the bond sector. So fixed income bonds of pipeline companies as well. It's another area that we find unbelievably attractive.

Thanks, Nolan. Make sure you guys take a look at the newsletter this week. We're going to cover the travel and the pipeline story in a little bit more depth if you want to learn a little bit more about that. So thanks again for being with us and we'll see you again next week.