During the Napoleonic wars, Nathan Mayer Rothschild has been quoted as saying: “Buy to the sound of cannons, sell to the sound of trumpets.” Given the fact that we are not only dealing with an alarming and escalating Ukraine war but also increasing inflation and rising interest rates, should we blindly go forward and act on Rothchild’s sentiment?
Of course, our hearts are breaking for Ukraine, and we are fearful of the possibility of just how far this war will go. However, as investors, we must stop and consider that historically speaking, market sell-offs due to geopolitical events have always righted themselves very quickly. While it would be easier to let our fear prevail and sell, we must act on investment opportunities for ourselves or clients. While it may be a bit early and there may be an additional downside, market technicals suggest that the current investment markets are oversold.
The following areas of investment look compelling and undervalued:
Growth and Technology: Most strategists are suggesting sticking with Value stocks. However, valuations have pulled back significantly for growth and technology names. Proof of this can be seen in the following facts. Ukraine
- Value managers are starting to pick up technology names that once were too expensive.
- Long/short managers are buying stocks of companies that they had previously shorted.
- Strong semiconductor companies are selling at valuations that warrant 15-25% upside from current prices.
While the pullback is warranted for many technology names that lack profitability, sticking with those with positive cash flow, competitive advantages, and stable profit margins is the way to go. Ukraine
Funds and stocks in this category that have upside potential include:
- Adobe (ADBE): Off over 30% in three months, even though its revenues are growing 20% a year and it has free cash flow has increased 24% annually over the last five years. Adobe’s experience cloud segment is thought to have more growth potential than its current businesses. The upside for this stock is 20% to 25% over the next 12-months.
- Nvidia (NVDA): NVIDIA is the “best in breed” when it comes to graphic processing unit semiconductors or GPU’s. NVDA’s GPUs are not only used in gaming devices, but also in crypto mining and data centers. All three of these industries are experiencing high demand. NVIDIA has pulled back 18% year to date. The upside potential is 30% to 35%.
- Lam Research Corp (LRCX): Lam is a semiconductor equipment company. With the supply/demand imbalance for semiconductors, there is a need for more semiconductor equipment to help facilitate production. LCRX manufactures equipment that is used during each step of manufacturing. Stock is off almost 25% year to date. The upside potential is 30% to 35%.
- Harbor Disruption Innovation Institutional Fund (FHAMGX): While this fund is new, the sub-managers have established backgrounds in disruptive technology. Harbor Funds takes the best ideas from four portfolio managers to create a concentrated investment portfolio. The fund goal is to benefit from Tech’s upside potential, but also manage for downside protection.
Small-cap stocks, especially small-cap value stocks, look very attractive. Many are selling at large discounts despite their ability to generate positive cash flow. Ukraine
Funds and stocks in this category that have upside potential include:
- Transamerica Small Cap Growth (ASGTX): While the TransAmerica label is on this fund, it is managed by Ranger Capital Group in Dallas. Ranger uses the GARP discipline-growth at a reasonable price. While the GARP discipline focuses on investing in companies that are growing faster than their peers and have competitive advantages, the emphasis is also positive and growing cash flow.
- Medpace Holdings (MEDP): Medpace is one of ASGTX’s holdings. Med place holdings provides clinical development services to biotechnology pharmaceutical and medical device companies. While they have bounced back from their 2022 low, the upside could be in the 15-20%.
International stocks currently sell at a discount compared to domestic stocks. However, the current discount is more than its 20-year average. While Europe may face long-term challenges, Asia’s and India’s markets look attractive. Emerging markets had a horrible year last year. Now be now may be the time to diversify outside of the US. Ukraine
Reasons to consider investing in emerging markets:
- Many emerging market countries are just starting to lift their Covid restrictions. Their economic recoveries will follow shortly.
- Several of these countries produce much-needed semiconductors and other technologies.
A mutual fund in this category that I am buying is:
- JPMorgan Emerging Market Equity Fund (JEMSX): Focus is investing in companies that benefit from the increasing number of middle-class consumers in the emerging markets-especially India and China. This fund has heavy concentrations of technology and financial services companies. While the fund’s manager underperformed last year, their 3-, 5- and 10-year records are strong.
The Russia/Ukraine War will no doubt increase the pace of transition to “green” energy. While the U.S.’s ability to produce its own oil is positive, the desire to decrease our dependence on other countries is increasing. Increased use of “green” energy will facilitate our energy independence.
Many investment firms are stepping up the introduction of their “green” investment products. One fund in this category to consider is:
- JP Morgan Sustainable Leaders Fund (JIISX): The fund focuses on companies that provide climate policy solutions and assist in the transition to a low carbon economy. While the fund is new, JPMorgan has one of the best research teams in the investment world. If someone wants ESG with investment results, JPM has the money and intellectual intel to deliver.
While it may be hard to push aside our feelings of fear and empathy, tactical investors who take advantage of these discounts will be rewarded. As we saw at the beginning of the Pandemic in April 2020, markets quickly bounce back. Fear and paralysis are not valid investment strategies during any crisis.
ABOUT MICHELLE CONNELL
Michelle Connell, CFA, owns Portia Capital Management, LLC, a Registered Investment Advisory firm specializing in the investments of foundations, charities and high net worth individuals. Portia Capital Management is the only investment management firm in the Dallas-Fort Worth area to be owned by a female CFA charter holder — an important resource in a world where 60% of women retire in poverty. Michelle’s expertise is backed by more than 20 years of financial experience in management positions with large investment boutiques and private banks.
She is also one of the highest-rated finance professors in the U.S, currently serving as an adjunct professor at The University of Texas at Dallas. She works with her students and clients to understand the value of crafting a portfolio that includes conventional products as well as alternative assets, including private equity, private debt, and real estate, and allows investment portfolio creation with greater downside protection and more consistent returns. In addition to her work with students and clients, Michelle teaches the CFA Review through the DFW CFA Society – The Chartered Financial Analyst Designation is considered the highest designation in the investment management profession.
She also founded “Portia’s Children,” though which up to 10 percent of her company’s profits are donated to the North Texas Charity, Educational First Steps.
By: Michelle Connell CFA
