Where I'm Finding Stock Opportunities in a Time of Uncertainty

Notably, compared with July 2019, retail sales were up 18.9%, according to U.S. Census Bureau data analyzed by Marion Capital. In line with the thesis that consumer demand is robust were positive Q2 earnings reports from large retailers such as home improvement and home décor stores. 

While U.S. manufacturing activity grew at a slower pace in July due to raw material shortages, the ISM New Orders Index — at 64.9% — marked its fourteenth month above 60, reflecting strong overall demand. Another positive for future production growth was very low inventories in July. The Inventories Index registered 48.9%, 2.2 percentage points lower than the June reading of 51.1%.

It’s clear from all the recent inflation data that we do have inflation — in both wages and shelter costs — but based on Powell’s speech in Jackson Hole, the Fed sees inflation as not only largely transitory, but under control. Some of the stickier parts of inflation will dampen as productivity continues to rise and supply chain disruptions resolve themselves.

Where I’m Finding Opportunity

The impact of delta is an ongoing concern for both companies and the broader economy, but in the last few months we have seen more positive data than negative data. Key indicators show consumer demand — constituting 70% of GDP — is strong, which will fuel new orders, manufacturing and corporate earnings.

At the corporate level, second-quarter earnings indicated a recovery across a broad range of sectors such as retail, financials, technology, housing, steel, pharma and consumer staples. 

A reliable measure of U.S. corporate confidence is mergers and acquisitions activity. In the first 8 months of 2021, we have seen $3.6 trillion in transactions versus $3.59 trillion for all of 2020, according to Refinitiv. The fact that companies with free cash flow are choosing M&A over stock buybacks or dividend distributions demonstrates that they are optimistic about the future. 

As we head into September, a notoriously volatile month, I am maintaining my barbell, with an emphasis on companies in cyclical sectors such as industrials, materials, energy and financials, as well as reopen stocks that have taken it on the chin and are good buys right now. Sub-sectors to consider are airlines, hospitality, leisure, restaurants, casinos and entertainment companies.

As we gain clarity on delta, I expect to see improved earnings from this group of companies, many of whom are down double digits year to date. On the growth side of my barbell, I continue to own companies with large total addressable markets, such as secular tech, cloud, data center, artificial intelligence, electric vehicles, wearables and semiconductors. 

COVID is still with us, but it will not be here forever. Now is a good time to be opportunistic and find companies with exposure to the economic recovery, good margins, free cash flow, operating leverage and pricing power. 

Stephanie Link is chief investment strategist and portfolio manager at the national wealth management firm Hightower. She leads the firm’s Investment Solutions Group, which specializes in outsourced chief investment officer services, model portfolios, separately managed accounts, investment research and due diligence for Hightower advisors. Follow Stephanie on LinkedIn and Twitter @Stephanie_Link.