By Michael Brush
Fed policymakers surprised a lot of investors on Wednesday by signaling that tapering and interest-rate hikes are finally on the way.
Investors sat up and noticed because “taking away the punch bowl” has doomed many a growth cycle. That’s not probably not likely any time soon. But this was a key turning point for the Fed — with clear implications for investors.
Here are the five key takeaways.
1. You should now favor quality
The Fed policy shift confirms we are moving toward the middle of the economic cycle from the early stage where rip-roaring growth is the norm – which benefits more speculative stocks. This means it’s time to favor quality in the stock market, says Emily Roland, the co-chief investment strategist at John Hancock Investment Management.
What does “quality” mean? Companies with characteristics like better profit margins, strong balance sheets, good free cash flow and higher returns on equity, she says.
You could set up a screen for all these qualities. But here’s a shortcut. “The sector that has highest overlap with quality is technology,” says Roland. “Technology can weather a more modest growth climate.”
Roland declined to suggest individual names, but here are a few ideas. One is Asana /zigman2/quotes/221282045/composite ASAN -0.12% , which offers software that helps workers compartmentalize all the time vampires at work – like email and other communications — and better define and understand complex issues in the workplace like descriptions of who is responsible for what, the details of tasks on hand, and overarching missions and goals. The stock is up 123% from where I first highlighted it in my stock letter Brush Up on Stocks (link in my bio below) in November 2020, and 13% from where I just reiterated it on June 15.
I suggested and bought this as a multiyear position, and it has more room to run from here, given the growth trends. Sales grew 61% in the first quarter, and company raised full-year guidance.
Next, I recently reiterated Microsoft /zigman2/quotes/207732364/composite MSFT +0.48% in my stock letter because of some insider buying and exposure to the cloud computing transition mega trend. You can see more on Microsoft in my overview here .
2. Stay with reopening plays
For Brian Barish, a portfolio manager at Cambiar Investors, the biggest takeaway on the Fed this week was its acknowledgement that extreme monetary accommodation needs to come to an end relatively soon. That’s good news.
“There is a perception among a lot of people that the Fed has had a somewhat reckless posture,” says Barish. “It has had a policy consistent with another Great Financial Crisis type recession. In a very positive surprise, that is not what happened.”
But while it’s due time to cut back stimulus, a more aggressive Fed also makes investors nervous because of the possibility for policy errors that create the next recession. Barish is not concerned about that just yet. So he’s sticking with reopening plays, like the casino company Penn National Gaming /zigman2/quotes/209264611/composite PENN +2.47% . Besides picking up business as people come out of hiding and visit casinos again, Penn National Gaming has solid exposure to online gaming through its ownership of Barstool Sports.
“Online gaming is a big, long-term market. We are literally in the first inning,” he says. Only one of the big four states in the country — New York — has approved online gaming. Barish thinks California, Texas and Florida will also go along; the tax revenue is just too tempting.
Barish is worth listening to because the Cambiar Opportunity Fund /zigman2/quotes/209711246/realtime CAMOX +0.79% he helps manage beats its Morningstar large value category and Russell 1000 Value /zigman2/quotes/210598148/delayed RLV +0.60% benchmark by 3.5 percentage points annualized over the past five years.
Next, Barish likes Uber /zigman2/quotes/211348248/composite UBER +2.28% , the ride-hailing software company. It has the advantage of size over competitor Lyft /zigman2/quotes/208999293/composite LYFT +2.12% . New management has cut back on more speculative investment projects like flying taxis. “As we get to other side of the pandemic, Uber will be an indispensable service,” says Barish. You can see my overview of Uber and Lyft here .