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The recent events in the market have made some investors cautious as the S&P 500 recorded its worst day since January on April 12. On the day, the index is down 1% from March 12 levels. According to a Hubbis report, Smead Capital’s Cole Smead warns of a potential 1970s-style inflation surge due to unchecked government spending. Even though the Fed reiterated its expectations of three rate cuts in 2024 at its latest meeting, many experts believe that there are more likely to be two cuts this year at the most. On the other hand, Smead sees a 15-20% chance of the Federal Reserve raising rates amid persistent inflation. He predicts negative real returns from the S&P 500 over the next decade. In the current situation, Cole Smead suggests a cautious, value-driven investment strategy to navigate market volatility effectively. He believes that there is an approximately 80% likelihood that sectors like banking, energy, and homebuilding, which have recently shown lower returns, could now show remarkable performance compared to their historical performances. These sectors are trading at significantly low valuation multiples which create more optimistic investment opportunities, compared to the sectors with high valuations.
On April 11, Cole Smead reiterated his above-mentioned expectations in a CNBC interview and said that non-US markets are likely to perform better than the S&P 500. Additionally, he has a bullish view of big oil and the financials sector. As of March 31, the Smead Value Investor Fund has given the highest weightage to the consumer cyclical sector at 24.13%, followed by the financial services and energy sector at 20.73% and 20.13%, respectively.
Seeing a Little Positivity
Aureus Asset Management’s co-founder and executive chairman, Karen Firestone doesn’t paint as bleak a picture as Cole Smead. In a CNBC interview on April 5, Firestone said that the recent correction in the market was quite expected after phenomenal growth over the last 6 months. However, Firestone’s firms still trimmed its positions in several stocks as they “got too big for the portfolio, or somewhat overpriced.”
When asked about her best ideas for the second quarter and beyond, she put forth the name of NextEra Energy, Inc. (NYSE:NEE) as she believes that the stock severely underperformed in the past and is trading at a very attractive valuation. At the company’s Q4, 2023 earnings call, NextEra Energy, Inc.’s (NYSE:NEE) CEO, John Ketchum also reassured investors about the company’s future performance and made the following statement:
“Over the past 10 years, we have delivered compound annual growth and adjusted EPS of roughly 10%, which is the highest among all top 10 power companies. Over that same period, the remaining top 10 power companies have achieved, on average, compound annual growth and adjusted EPS of roughly 2%. Notwithstanding the strong adjusted EPS results, we recognize and are disappointed by the underperformance in the share price. And as we start 2024, we remain steadfast in our continued focus on execution and creating long-term value for shareholders.
We believe the disruption over the last two years has made NextEra Energy an even stronger company. Our business model is more resilient, our development platform is even more advanced, and our supply chain is more diversified than it has ever been. Bottom line, we believe NextEra Energy is well positioned headed into 2024. And there is good reason for optimism at NextEra Energy.”
Aureus Asset Management’s Under-the-Radar Pick
In the above-mentioned interview, Firestone also showed bullish sentiment toward The Charles Schwab Corporation (NYSE:SCHW) when asked about her firm’s “under-the-radar- pick.” She believes that the company is one of the dominant players in its industry, has a low price-to-earnings ratio, and its forward earnings have significant growth potential. Firestone added that if one looks at The Charles Schwab Corporation’s (NYSE:SCHW) stock chart, it seems like it’s going to move up from now on. At its Q4 2023, earnings call, the CEO of the company, Walter W Bettinger revealed the company’s plan future plans and said:
“In 2024, you’re going to see an emphasis on execution, but with consistency around our strong client fundamentals and strategy. I recognize that 2024 is going to be a transition year from a financial standpoint, albeit one with steadily improving financial results throughout the year and a very strong exit into 2025. It’s unrealistic to think that…
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