Markets Still Struggling: How Can Investors Catch Up? Jarvis Market Update 6-9-2022

Markets are back to the negative, but one sector continues to stand out from the rest. We cover that and 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.

Glad to be here, Brian. Glad to be talking stocks. It's always exciting.

Never a dull moment in these markets, Nolan. So just a quick preview. After 2 weeks of good news in markets, we experienced a pretty strong reversal this week. In this episode, we're going to cover 3 topics as we usually do. The first is a discussion of energy. Our second topic is going to be the beginnings of a reopening in China and the implications that come along with that. And third, we're going to talk about how can investors play catch up. And before we get into the market recap, a couple of announcements. First of all, for our research subscribers, 2 new reports this week, one on a growth business in the beverage industry, and the other is on a broken growth stock that is beginning to show signs of life. It's also an off week for the newsletter, so look for us again next week. But we have, uh, our latest episode of Left Brain Thinking podcast, and we covered money management for millennials. So check that out and get on the mailing list if you want to get all of our content each week in your inbox. So the market recap, uh, the S&P was down around 3.8% for the last 5 days. That covers Friday to Thursday of this week. Nasdaq was down 4.6%, slight outperformance from the Russell, the small-cap index, down around 2.5%. Uh, 10-year U.S. Treasuries crossed the 3% line. In terms of leaders, energy was definitely the leader this week, industrials and materials as well. On the lagging side, we had real estate, utilities, and financials. So, Nolan, what are your general thoughts on, uh, what we've seen this week?

It's more of the same. We do get these pockets of strength where you get a week or two of respite from the selling, the market perks up a little, and you have these more violent down down days. So there's no new news to really report. I'm sure us, like everybody else, will be happy when we get some signs of bottoming. We get some more clarity on the economic outlook. We get more clarity on inflation and company margins. You know, that's, that's a real big deal. This inflation is hitting companies, uh, from their cost, whether it's transportation, logistics, or supplies. Some companies are passing it on to consumers. Some are deciding to eat it. And in both cases, it's hurting margins. But as we always say, the cheaper prices become, the higher possible future returns.

With that, we'll jump right into the first topic. So topic 1, we're saying energy continues to be the standout sector. So the markets did sell off pretty heavily on Thursday, today. However, energy, as we look at the XLE, the ETF that covers a lot of the major energy companies, was still up a little over 2% for the week despite weakness in the overall market. Among our top performing ETFs were XOP, that's exploration and production, PSCE, that's small-cap energy, CRK, that's refiners, and then OIH, which is oil service. So supply remains tight in the oil market. Prices continue to move higher. So, Nolan, can you talk to us about what you're seeing in energy and what's the outlook for the rest of the year?

I think the outlook is overwhelmingly positive. As long as energy stays, I'm going to say $80 or more, then I think all these stocks have room to work. What you've seen so far in the returns have just been their earnings have just grown so fast with the increase in oil prices, which stirs up activity. So the servicers are more busy. We're even seeing offshore start to get a lot more action. What you've seen so far is just, hey, earnings were up 30%, 40%, 50%. So the stocks are up 30%, 40%, 50%. What you haven't gotten is people are saying, hey, we're willing to pay more for these businesses. So I think we still have a ways to go to play catch up in energy, even if that price settles down at a lower price.

Yeah, I agree with that. So, Nolan, we've, we've done some research throughout the last few months. Energy is a smaller percentage of the S&P than it has historically been, even though it's had quite a run here. I think it's a little over 4% of the S&P now. Historically, it's somewhere in the 6% and 7% range. So what that says to me is there's plenty of investors that are still underinvested or uninvested in oil. So can you, can you speak to those investors? Kind of what would be the best way to get started with oil? Is it through some sort of an ETF? Are there a couple of names that come to mind?

So you may want to go with big and boring. And if that's the case, ExxonMobil is a name that is high on our list. Rockefeller started the business over 100 years ago, and ExxonMobil is still there churning out oil and natural gas and chemicals and everything else. So that's an easy way. You do get paid to wait. You get a 3.5%, 3.6% dividend yield, depending on the share price. Share price just accelerated through $100 a share. And we think it can go much higher over the next couple of years. And I'll just say, as far as the indexes, energy makes up a lower single-digit percentage than it has. But if we have anything going like we did back in the '70s and '80s, remember at one point, uh, oil was, you know, it was 20% of the indexes. So once this thing gets moving, if we have a return of inflation or stagflation, Energy could grow quite a bit.

Yeah, absolutely. I think the fundamentals of oil are definitely in the favor of these businesses. And I think another part that isn't really considered or spoken about enough is the capital return story that's going on here in oil. So for a number of years, oil companies were overspending, weren't taking care of their balance sheets and their fiscal responsibility, but they've changed their tune. And they're definitely returning money to shareholders in the form of dividends and share buybacks. So not only is the business looking good, but that capital return story is definitely strong and definitely in the investor's favor. With that, we'll move on to topic 2. So topic 2, Nolan, is the China reopening. This has been a huge story for the last, I don't know, 6, 8, 10 months. China has tried to keep this zero COVID policy. So that's meant really in practice shutting down almost everything in the society, business, schools, you name it. And that's had huge implications throughout the world, just, just as vital as China is to the supply chain. But things are starting to reopen in China. And, you know, the stocks in China had fallen not only due to this, but also other factors inside of the country and the political situation there. Some of the top-performing ETFs in our list this week were KWEB, that's China tech— and FXI, China large-cap stocks. I guess the question that comes to my mind, Nolan, is China becoming investible or are we just seeing a dead cat bounce here? And what are the wider implications of what we're seeing out of China?

I don't know that we can draw any wide conclusions. You know, it's them coming out of lockdown, I think is good. It's not only good for China, it's also good for the rest of the world because they're the second largest economy. You know, we need to them to contribute to global GDP. So I think that is a benefit also for materials producers that sell into China— iron ore, copper, aluminum. As far as the Chinese internet and Chinese tech stocks that have been rallying, you know, it looked like China was sort of easing up on the regulatory burden. They've even gone so far as to maybe unlock the Ant IPO, which was the financial services part of Alibaba. And so I think the animal spirits, the sentiment has gone from really bad to less bad. Hey, the government was a headwind, now they're going to be a tailwind. But generally, we don't want to do any investing where we're counting on a government to kind of show us the way. It's sort of the anti-capitalistic way. And in our minds, it could be a trade but not an investment.

Okay, and I think that's important to note for investors. I think it's tempting. A lot of these stocks are beaten down 70, 80%, and so a lot of folks are looking for a way to catch up. I think there are better ways. Um, let's talk again about more about the broader implications of things here. China lockdown has really hurt a lot of the U.S. multinationals that operate in China. And one that comes to mind for me is Starbucks, SBUX. That stock has been absolutely crushed. Um, not only that, but also management change there. What do you think about Starbucks? Is this the right time for Starbucks?

Of course, you know, I'm very fond of Starbucks— the branding, the product, the margins, the valuation. Yes, there's a lot to like. And you're right, China reopening which I believe is their largest market outside the US, is going to provide a real catalyst to those revenues and to those earnings. And I'd much rather play China rebound with Starbucks than I would one of those businesses that, you know, an Alibaba or Tencent or a Baidu. The other thing is the casino operators are there, which have pretty much heavy China business, whether it's Las Vegas Sands, or when, uh, and the lockdown really has hurt their business. But we haven't seen that much perk up in those shares. So it hasn't been universal that investors have been bullish across China. It's been certain select sectors. So I have to watch it the next couple of weeks and, and, and see if this continues.

Before we move to topic 3, we want to remind you, as always, if you enjoyed the video, found it useful, like and share the video, uh, subscribe, make sure you get the next video, and hit the bell for notifications. And also, uh, make a comment, we'll be happy to respond. With that, we'll move on to topic 3. So topic 3, a question that's on everyone's mind, Nolan. We're all kind of in the hole here for 2022. How can investors play catch-up? So after COVID, most of the market's outperformance came from tech. We all know that, whether it be large-cap tech or the ARK-type names, the unprofitable but heavily high sales growth companies. Most of these stocks have come off the boil. Investors are kind of wondering what to do with those stocks. Should they dump them, move on? Should they double down? I know we all want to make up for the heavy losses, but it's hard not to anchor to the stocks that worked for us in the past. How can investors play catch-up? Should they double down on the ARK stocks or all the other tech stocks, or should they look elsewhere?

One of the toughest questions in investing is, when do I sell? But I don't think that was your question. But for anybody holding these legacy positions where you see significant downside and you're just sort of waiting for them to come back, you know, I certainly pity you because there's an emotional attachment that really in our world we think should be detached. What moves prices is acceleration in fundamentals on the upside. So that's some business that was growing at 20%, now it's growing at 25%. It had earnings per share of $10 a share, and now we expect them to go to $15. And then the other side is multiple expansion. Hey, we're willing to pay 10 times earnings for this business before. Now we think it's worth more, so we're going to pay 20. If you take a look at both of those characteristics, we can have multiple expansion, and two, the fundamentals of the business are improving, accelerating. None of that is really found in tech. Fewer areas than it was a year ago because the economy is sort of stalling. You can still find it, but not in those areas. So, playing catch-up is having my money in shares or some security that's moving up. The opposite of that is some security that continues to make new lows. So, I would say you want to get out of the latter category and into the former.

[Speaker:CASEY_WEADE] Any advice for people that are trying to get past that psychological hurdle of holding on to these stocks that made them so much money in the past?

No, because nothing I say is going to work. I remember Y2K and, you know, the tech bubble burst and people held shares at $100. And then it went to $80. And, you know, you could suggest that they move to something else or diversify, and they would just wait. And then once it got to $60, and then it was too late to sell, it's got to come back. And then once it hit $40, it's too cheap to sell now, should I buy more? And it really, you know, it wasn't till, you know, it got to the single digits or something that they wanted to give up when it was absolutely hopeless. And there's still a lot of hope out there now. So for a lot of these businesses, especially the ones like you mentioned, high valuation, but there is no free cash flow, I think they're going to have to wait till a very different cycle emerges. Now, how long that takes, I don't know. But I don't think it's going to be a one-quarter story.

Well, at any rate, if you're trying to find a way to get past it, um, we can help you. Give us a call, we'll talk you through it and tell you a little bit about some of the things we do think are working. Nolan, it's been a tough week out here, but we have seen still some strength and energy. Just to review, 3 topics we covered: energy continues to be the standout. Secondly, a little bit of reopening in China and the implications that came along with that. And third, How can we play catch up? Any final thoughts as we wrap up for the week, Nolan?

On the catch up thing, I have two things to mention. One is one strategy that investors can use is concentration. Now, again, we suggest that if you don't, that you use an advisor, and if you don't have an advisor, we're here to help you with your portfolio. But one way to play catch up instead of owning a lot of things you think are going to come back is to own, you know, a handful of things. Now, again, it still presupposes that what you're buying is going to move up. The second thing I would just mention, you said energy. Energy is very, very big. A lot of people tend to think, you know, just oil, but natural gas has moved up. There's reason to believe that that's going to hold up as well. We've got the pipelines, which I love. You have oil service companies. You even have alternative energy because as the price of oil goes up, the alternative business becomes a lot more attractive relatively.

It's all helpful. I think it's a good way forward, Nolan. Uh, with that, we'll say goodbye to everyone. Appreciate you, and we'll see you again next week.