I’m seeing some very exciting developments in the current market. Things are popping again and there are compelling opportunities in sectors that present current value and significant growth potential. Today, I hear two types of concern. The first is that the markets are way too high and overvalued. The other is a palpable fear of missing out (FOMO). This update will address these fears by showing you what I’m really excited about, right now (and what I’m not excited about….)
Please note this is not a recommendation to buy any of the following securities or investments. Investors should make their own decisions or consult with their financial professional. In full disclosure, clients of All Season Financial, may own some or all the following securities in their managed accounts with our firm.
Let’s get into it.
End of October is the End of Mutual Fund’s Tax Year – preamble
Let me explain a little-known fact about our industry, which we saw play out in perfect form on Friday. October 31st strangely marks the end of the fiscal year for most mutual funds in the finance industry. Managers of mutual funds, of which there are still many managing $21 Trillion dollars, use the end of October as a time to do several things. They want their “current holdings” to look good to their shareholders in those glossy mutual fund prospectuses delivered later in the year. Looking good means owning popular things, like Apple and Microsoft and Tesla. Looking good also means NOT owning small caps, internationals, emerging markets, or other asset classes that have been trending down for the year. In industry terms, this is called “Window Dressing” and it’s a bigger thing than most are aware. On Friday, we saw all the old mega cap tech stocks get a nice bid higher by 1%+, while small caps, for example, lost over 1% and emerging markets lost 1.5%.
The end of October also marks the day of reckoning for taxes. Those same managers would necessarily want to sell things held at a loss to minimize their annual taxable distribution of realized gains to their shareholders. Consider the fact that over 24% of the S&P 500 stocks are negative on the year and you can imagine that managers had a lot of options to sell holdings and reduce their tax liability. To the market observer, you might have noticed that stocks trading down on the year, traded down a lot more last week as this tax loss selling process was completed.
The good news is that today is November 1st, and all of the mutual fund manager operational trading is now done! And today we are seeing real strength on some of the areas that I’m excited about owning.
I’m Excited About Small Caps!
Wow, today was a breakout day for small caps to be remembered! This happened while the large cap growth names actually lost money on the day. Small caps finished the day up between 2 and 3%. Why should you be excited? Well, if I had a dime for every investor who said they don’t want to put money into the market now because it’s overvalued, I would be retired now. Consider these facts:
- Small caps are trading at a 26% discount to large caps, one of the widest valuation margins in recent history.
- Small caps have been consolidating gains since March and are now bouncing right off the long-term Uptrend line!
- Small caps have a history of outperforming the market between now and the end of January.
- Small caps are going to benefit from a lot of domestic spending on infrastructure
- Small caps represent nimble companies that can be wildly profitable and adaptive during very dynamic economic times like these. Much more so than large or mega cap companies.
Here’s a snap of the chart of the Small Cap Growth ETF (IWO) which we own for clients as of today.
I’m Excited About GAARP! (Growth At A Reasonable Price)
In our New Power investment strategy, after a long painful summer of consolidation in prices, we are seeing recent and persistent strength in the renewable energy sector (solar, wind, batteries, green hydrogen, fuel cells, etc.). This has been our expectation all summer as the new $Trillion Federal spending bill takes shape with renewed investment in climate-oriented infrastructure. Our New Power strategy remains fully invested and just gained 11% in the last two weeks. Beyond renewable energy, there is also a new group of companies that fall into the basic materials sector, who are reinventing input materials to be less energy intensive, biodegradable, sustainable or otherwise “green”. One example which we have owned for almost 6 month is Danimer Scientific (DNMR) which makes biodegradable, compostable, polymer bioplastics WITHOUT petrochemicals.
https://danimerscientific.com/ – read all about it
In short, they are finally bringing us a true biodegradable water bottle to serve a global consumer that just can’t stop buying single use plastic water bottles (shame on us!). We hope to see an end to this madness.
We have made two purchases of DNMR, one in late May and the other in August. Both purchases are held at a modest loss (still). But today was a big day for DNMR (+20.39%) and it looks to be breaking into a new long-awaited uptrend after falling more than 70% from its high of last year. Like I said, investing is often about patience, and I hope our wait is almost over. I’m excited!
Also in our New Power strategy, we have another great investment in an old name that is going to be a game changer in the electric vehicle space – Ford Motor company. Yes, we still own Tesla (TSLA) but I’m not as excited about that name as Ford (F). Ford just raised its dividend last week for the first time in years and trades at a below market Price to Earnings (trailing 12 months) ratio of 19 versus Tesla at 218! For all the attention paid to Tesla which is up 57% YTD, Ford has been quietly up 97% YTD. Ford is not just the next electric truck. The Ford 150 is the best-selling pickup truck in the world; almost 1 million units/ year. That truck is going all electric with the 2022 Lightening! This truck alone will create a bridge between two cultures. That truck driving guy that tends to lean far right, will finally have reason to embrace a clean green, electric transportation future. There will be no resistance because there will be no other option. Again, I’m excited about the options I see TODAY for new investments like these, (speaking ever so softly to those who think there is nothing to buy today).
I’m Excited About High Dividends That Beat Inflation!
Inflation is a theme we’ve covered at length. It’s here, it’s going to be here for a while and it’s going higher from here. Enough said. We’ve talked about the importance of not sitting on a pile of cash in the bank earning zero, worrying about inflation and a market that doesn’t appear discounted or to have any opportunity. So, here’s another great option. Our MultiAsset Income strategy is currently generating an estimated annual dividend yield of 6.26%. Inflation is running at 5.3%. Now, if the prices of all 38 securities held in this portfolio did nothing for an entire year, your portfolio would still beat inflation through the dividends generated. For instance, one of our holdings is AGNC Investment Corp. (AGNC) which pays an annual dividend of 9.39%. This is a company that effectively leverages Federally backed (agency) mortgage securities into a dividend generating portfolio. YTD AGNC is up 9.69%, but down from it’s high in June by 14%. Every month, AGNC pays its shareholders 0.12 per share. So, for the last 5 months, while the price has been falling, we have received over 4% in dividends. All good! AGNC is very likely to continue higher in price, but the point is, you get paid to be patient!
Thus far, the prices of our holdings have been appreciating very nicely as the world is hungry for dividend yield. MASS Income is up over 23% YTD in total return net of fees adding to the 26% gains generated in the last half of 2020. The strategy is well diversified in equal thirds to stocks/ stock funds, alternatives, and bond/credit funds. We’re happy to walk anyone through the holdings and the strategy but suffice it to say that this is exciting stuff.
Other Things I’m Excited About
- Having a great team at All Season – they are the best!
- Being an empty nester – new chapter
- Getting in another day or two of fishing before winter hits
- Tacos and Tequila – Sarah and I last night
Things I’m Not So Excited About (speed round)
- Investors who think this is a game and love to gamble with their net worth for entertainment
- Metaverse
- SPACS, NFTs, 6500 new crypto currencies in the last two years
- The concentration of market capitalization in 5 names (you know the names)
- Higher taxes
- Treasury bonds
- Crazy politicians doing crazy things (still)
- Worrying about a fight breaking out on my airplane
- The cost to fix my dryer – $481
That’s it for this week, enjoy the last of Fall!
Cheers,
Sam Jones
