So, how does one invest in this topsy-turvy equity market environment?
That’s a good question – as the market is facing heightened volatility, economic instability and sector closures as well as emerging technologies. For institutions this is certainly a challenge but for retail investors it can be a nightmare. Everyone has questions and finding the right answers can be its own headache. Michelle Connell, CFA, and owner of Portia Capital Management, LLC, a Registered Investment Advisory firm, took some time out her schedule to discuss with Traders Magazine Editor John D’Antona Jr. how to navigate the equity market and where she sees opportunities.
TRADERS MAGAZINE: How do investors strategically navigate the equity market right now?
Michelle Connell: Investors should be patient and approach the investment markets carefully. Start raising cash to deploy in several tranches over the next few months. While the U.S. economy has lived through recessions and financial crises, a global pandemic is uncharted territory. No one has any idea when we will return to normal-or what the “new” normal will look like.
I believe there will be plenty of opportunities for making profits through trading, as well as through long term investments.
TM: Where are these opportunities?
Connell: Well, the average recession has lasted 22 months and results in an average correction of 42%. Now, the general belief is that the economy will recover within a few months. However, that seems wishful thinking given that the current unemployment rate is almost 15% and that 20% of those unemployed work in industries that consumers may be slow to resume business.
During bear markets, the stock market never moves in a straight line off a bottom. On average, the stock market rebounds off a low point ten-twelve times before it finally settles to find a base. (My research: 1987-2009.)
As of April 8th, the S&P 500 had regained 50% of its recent losses and P/E (Price to Earnings) valuations once again exceeded twenty-year averages. Maybe that would be rational if we even had a clue as to what earnings will be for the rest of 2020. My advice would be to be careful and not buy full positions of companies (or most mutual funds) until they report their March 31st quarter over the next few weeks.
TM: What do you do with the cash you’re holding? Buy stocks? ETFs? Or just stand pat?
Connell: For short-term trading opportunities, begin by finding companies that will benefit in the short-term due to current health concerns or social distancing. Next, review their balance sheets and/or revenue streams for strength, Finally, try to gain an understanding of the company’s stock price’s upside and downside potentials. Average in with these positions.
Specific companies that I feel meet these criteria include:
Q2 Holdings (QTWO): cloud-based solutions for financial services
RingCentral, Inc. (RNG): cloud-based solutions for communications
SciPlay (SCPL): developer and publisher for mobile gaming.
Baxter International (BAX)
Becton, Dickinson & Co (BDX)
Like trading opportunities, investing involves fundamental and technical analysis. However, investing is more concerned with the long-term potential and competitive edge of a company or asset class. I would have the following types of mutual funds on my shopping list:
Small Cap growth funds: Even with the recent recovery in the stock market, the Russell 2000 is still down 29%. There are two reasons these stocks have been penalized. One, smaller businesses tend to have thinner profit margins and are less able to manage their expenses compared to larger companies. Also, over 20% of the firms in the Russell 2000 have negative cash flow and may have trouble paying their debt. However, the drastic selloff of small cap stocks presents an opportunity to invest some higher-quality, resilient small businesses at a discount,
Emerging Market Funds: Propelled by their growing middle classes, countries like China and India are expected to have GDP’s double of the U.S. and Europe. However, the valuations of the emerging market companies are significantly lower than the U.S. One caveat: find a good active manager for these funds. An understanding of politics, currencies and different cultures is required.
TM: What about ETFs?
Connell: During bear markets and times of volatility, avoid these. Redemptions of stock and bond ETFs can be limited during these periods.
TM: How are investors getting their research? How do they separate the good from the bad research?
Connell: Most retail investors get their research from financial websites. Most of the opinions on these websites come from amateurs (ie. non-professionals). Not only can a lack of experience be a problem here, but there may be an underlying motive for their opinions.
Even if a retail investor has access to institutional research from Wall Street, understand that they have conflicts of interests that typically lead them to give overly optimistic recommendations. In addition, research analysts can be victim to the same herd mentally as the retail side.
To make the best use of any research, public or institutional, compare analyses, review long-term track records of accuracy and look for any biases.
TM: Is the market too volatile for individual investors?
Connell: The investment markets are not too volatile for the patient and prudent investor. As was stated above, this is not a last-chance, “fire” sale. There will be good points of entry for traders and long-term investors.
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine, Markets Media Group or its staff. The investment recommendations made here are not those of the author, Traders Magazine, Markets Media Group or its staff. The author, Traders Magazine, Markets Media or its staff doesn’t advocate buying stock in any of the mentioned stocks. Trade and invest at your own risk.
Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community.