Archives September 2020

Dow climbs in early Friday action as Wall Street attempts to cap tumultuous trading week with an upswing


Stock benchmarks on Friday rose modestly higher as investors looked to close out a volatile, holiday-shortened week that has the tech-heavy Nasdaq Composite on track for its biggest weekly loss since the height of the pandemic-induced market selloff in March.

How are major benchmarks trading?

The Dow Jones Industrial Average
DJIA,
+0.19%

rose 117 points, or 0.4%, to around 27,650, while the S&P 500
SPX,
+0.07%

gained 14 points, or 0.4%, to trade at 3,353. The Nasdaq Composite Index
COMP,
-0.09%

climbed 48 points, or 0.5%, at 10,952. But all three benchmarks were trading off their intraday peak near the open, highlighting the week’s choppy action.

The Dow on Thursday fell 405.89 points, or 1.5%, to close at 27,534.58, while the S&P 500 ended with a loss of 59.77 points, or 1.8%, at 3,339.19. The Nasdaq Composite fell 221.97 points, or 2%, to finish at 10,919.59. Through Thursday, the Dow was down 2.1% for the week, while the S&P 500 was off 2.6% and the Nasdaq was 3.5% lower; markets were closed Monday for Labor Day.

What’s driving the market?

A decline in the S&P 500 index for the week would mark the benchmark’s first back-to-back weekly drop since May.

“While monetary policy is set to remain supportive for several more quarters, valuations are high across assets and volatility is resurfacing,” said Elia Lattuga, co-head of strategy research at UniCredit Bank, in a note. “The breadth of the rally is still limited and the recovery uneven—hence developments in the economic outlook and political risks represent significant threats to risk appetite.”

Stocks were unable to follow through Thursday on a Wednesday bounce that saw equities recover somewhat from a three-day, tech-led rout that pushed the Nasdaq into correction territory, falling more than 10% from its record close set last week.

Weakness on Thursday was partly tied to the inability of U.S. politicians to agree on a new coronavirus rescue package after Democrats blocked a Republican bill on the Senate floor, leaving the way forward unclear, analysts said.

Meanwhile, investors have fretted that the sharp rally that took stocks from their March pandemic lows to new all-time highs had left valuations significantly stretched for the large-cap, tech-related stocks that had led the rally this year. Among those highfliers, shares of Apple Inc.
AAPL,
-0.85%

 and Netflix Inc.
NFLX,
+1.22%

 were on track for weekly declines of more than 6%, while Facebook Inc.
FB,
-0.57%

 is off more than 5%.

In U.S. economic news, the consumer-price index for August rose 0.4% last month, beating average economists’ estimates for a rise of 0.3% but falling below the past two months at 0.6%. On a year-over-year basis, the CPI increased 1.3% after gaining 1.0% in July, the Labor Department said on Friday

Looking ahead, Federal budget figures for August are due at 2 p.m. Eastern.

Which companies are in focus?
What are other markets doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
0.675%

 rose 0.4 basis point to 0.687%. Bond prices move inversely to yields.

The ICE U.S. Dollar Index
DXY,
-0.12%
,
which tracks the performance of the greenback against its major rivals, fell 0.1%.

Gold futures
GCZ20,
-0.08%

were off 0.3% at $1,958 an ounce, threatening to snap a three-day winning streak. The U.S. crude oil benchmark
CL.1,
-0.10%

 fell 16 cents, or 0.5%, to $37.13 a barrel.

The Stoxx Europe 600 index
SXXP,
-0.11%

 was edging 0.1% lower, while the U.K.’s benchmark FTSE
UKX,
-0.26%

rose 0.2%. In Asia, Hong Kong’s Hang Seng Index
HSI,
+0.78%

and the Shanghai Composite Index
SHCOMP,
+0.78%

 both rose 0.8%, while Japan’s Nikkei
NIK,
+0.73%

rose 0.7%.



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Why Stocks Could Be Ready To Rally


It’s been a painful week for growth investors given significant declines in technology-oriented indexes and exchange traded funds. The NASDAQ 100 ETF (QQQ) fell over 11% from its intraday high this month to its intraday low this week, and returns were worse for software investors given the iShares Expanded Tech-Software Sector ETF (IGV) 12.5% drop from its month-to-date high to low point.

Source: Top Stocks for Tomorrow.

Many individual stocks fared worse. For example, high-flying Tesla (TSLA) lost over one-third of its value and Zoom (ZM), Wayfair (W), and Shopify (SHOP) declined by over twenty five percent.

Since many of the baskets and individual stocks that fell most were also those most extended to their 200-day moving average, it isn’t surprising they took the brunt of the sell-off.

Source: Top Stocks for Tomorrow.

However, our overbought indicator is still extended with over 50% of our 1,500 stock universe trading 5% or more above its 200-day moving average.

Historically, readings above 50% have preceded significant corrections, including the one we experienced this week and ideally, a correction would normalize this reading in the 20% to 40% range. Since we’re still north of 50%, it’s hard to argue all the pain has been felt when it comes to individual stocks.

The market itself could be finding its footing, though. Volatility can remain elevated for weeks following a 3% one-day decline in the S&P 500, but the market usually trades higher at some point within 30-days. In my experience, picking bottoms is more art than science, so it’s best to focus on ranges and be flexible. Ideally, I’d like to see a retest of this week’s intraday low followed by a heavy volume reversal day for confirmation, but as I said, flexibility is key. Many leading stocks may officially bottom before the market, so selectively buying leaders could be the best approach for investors.

Overall, it’s too soon to declare every stock has found its footing, but using down days to buy leaders in strong sectors and industries could be savvier than indiscriminately selling at this point. It’s far easier to proactively and non-emotionally prune portfolios into strength, than weakness, so the best time to raise cash was when we recommended doing it in August, not today.

Top-rated sectors now

Weekly, we rank major sectors so members can see which baskets have alpha-friendly tailwinds. It also helps investors spot emerging positive or negative trends. For example, consumer goods — a defensive group — strengthened throughout August as technology weakened, adding conviction to thinking the market was due for a correction.

Currently, industrials, services, consumer goods, financials and technology are the best ponds to fish in large cap. The top mid-cap sectors are consumer goods, services, and basic materials, while basic materials, services, consumer goods, and industrials are best in small cap.

Because utilities and energy stocks remain weak across all market caps, it’s best to focus elsewhere for stocks to buy.

Source: Top Stocks for Tomorrow.

It can also be useful to track sector strength by market cap. For instance, large-cap industrials score better than small cap industrials, and small-cap basic materials scores higher than large-cap basic materials.

Source: Top Stocks for Tomorrow.

The strongest-scoring stocks now

Our scores provide a systematic and objective way to rank over 1,500 high-quality stocks. Weekly, we run every stock in our universe through a 7-factor gauntlet explained more here. Overall, our model assigns scores based on the following factors:

  • Forward earnings growth expectations
  • Historical trends in reporting earnings that beat Wall Street estimates
  • Insider buying
  • Short-term and long-term institutional money flow
  • Forward valuation relative to historical valuation
  • Contra-trend short interest analysis
  • Quarterly seasonality over the past decade

Because stock prices follow earnings over time, insiders buy for one reason; money flow reflects institutional sentiment, and seasonal patterns can rhyme, high-scoring stocks offer a solid source of new ideas.

This week, over 100 top-rated stocks were shared with members, including these 80 stocks. I’ve highlighted the stocks seeing the biggest increase in score for convenience.

Best Scoring 9/10/2020 4 WEEK MA
Company Name Symbol Sector INDUSTRY SCORE SCORE
BASIC MATERIALS
Enviva Partners, LP (EVA) BASIC MATERIALS LUMBER & WOOD PRODUCTION 105 107.5
The Sherwin-Williams Company (SHW) BASIC MATERIALS SPECIALTY CHEMICALS 100 98.75
Cleveland-Cliffs Inc. (CLF) BASIC MATERIALS STEEL 90 88.75
The Scotts Miracle-Gro Company (SMG) BASIC MATERIALS AGRICULTURAL INPUTS 90 92.5
Air Products and Chemicals, Inc. (APD) BASIC MATERIALS CHEMICALS 85 83.75
FMC Corporation (FMC) BASIC MATERIALS AGRICULTURAL INPUTS 85 81.25
Compass Minerals International, Inc. (CMP) BASIC MATERIALS OTHER INDUSTRIAL METALS & MINING 85 82.5
Ferro Corp (FOE) BASIC MATERIALS SPECIALTY CHEMICALS 85 83.75
CONSUMER GOODS
Wolverine World Wide, Inc. (WWW) CONSUMER GOODS FOOTWEAR & ACCESSORIES 115 108.75
Simply Good Foods (SMPL) CONSUMER GOODS PACKAGED FOODS 110 108.75
Fox Factory Holdings (FOXF) CONSUMER GOODS RECREATIONAL VEHICLES 105 106.25
Constellation Brands, Inc. (STZ) CONSUMER GOODS BEVERAGES 100 93.75
Archer-Daniels-Midland Company (ADM) CONSUMER GOODS FARM PRODUCTS 95 92.5
Bunge Limited (BG) CONSUMER GOODS FARM PRODUCTS 95 87.5
Newell Brands Inc. (NWL) CONSUMER GOODS HOUSEHOLD & PERSONAL PRODUCTS 95 90
The Procter & Gamble Company (PG) CONSUMER GOODS HOUSEHOLD & PERSONAL PRODUCTS 95 98.75
National Beverage Corp. (FIZZ) CONSUMER GOODS BEVERAGES 95 98.75
The Hain Celestial Group, Inc. (HAIN) CONSUMER GOODS PACKAGED FOODS 95 91.25
FINANCIALS
Aon plc (AON) FINANCIALS INSURANCE BROKERS 105 91.25
Bank of Montreal (BMO) FINANCIALS BANKS-DIVERSIFIED 100 91.25
Brown & Brown, Inc. (BRO) FINANCIALS INSURANCE BROKERS 100 101.25
FactSet Research Systems Inc. (FDS) FINANCIALS FINANCIAL DATA & STOCK EXCHANGES 100 98.75
Marsh & McLennan Companies, Inc. (MMC) FINANCIALS INSURANCE BROKERS 100 97.5
Assurant, Inc. (AIZ) FINANCIALS INSURANCE-SPECIALTY 100 100
Eaton Vance Corp. (EV) FINANCIALS ASSET MANAGEMENT 95 82.5
Intercontinental Exchange, Inc. (ICE) FINANCIALS FINANCIAL DATA & STOCK EXCHANGES 95 98.75
Royal Bank of Canada (RY) FINANCIALS BANKS-DIVERSIFIED 95 93.75
Sun Life Financial Inc. (SLF) FINANCIALS INSURANCE-DIVERSIFIED 95 95
HEALTHCARE
Dr. Reddy’s Laboratories Limited (RDY) HEALTHCARE DRUG MANUFACTURERS 100 96.25
Medpace Holdings, Inc. (MEDP) HEALTHCARE DIAGNOSTICS & RESEARCH 100 105
LeMaitre Vascular, Inc. (LMAT) HEALTHCARE MEDICAL INSTRUMENTS & SUPPLIES 100 101.25
Alexion Pharmaceuticals, Inc. (ALXN) HEALTHCARE BIOTECHNOLOGY 95 85
Amgen Inc. (AMGN) HEALTHCARE DRUG MANUFACTURERS 95 86.25
DexCom, Inc. (DXCM) HEALTHCARE DIAGNOSTICS & RESEARCH 95 97.5
Edwards Lifesciences Corporation (EW) HEALTHCARE MEDICAL DEVICES 95 98.75
Merck & Co., Inc. (MRK) HEALTHCARE DRUG MANUFACTURERS 95 93.75
Penumbra, Inc. (PEN) HEALTHCARE MEDICAL DEVICES 95 96.25
Inspire Medical Systems, Inc. (INSP) HEALTHCARE MEDICAL DEVICES 95 98.75
INDUSTRIALS
Trinity Industries, Inc. (TRN) INDUSTRIALS RAILROADS 110 100
Arconic (ARNC) INDUSTRIALS SPECIALTY INDUSTRIAL MACHINERY 100 96.25
BWX Technologies, Inc. (BWXT) INDUSTRIALS AEROSPACE & DEFENSE 100 77.5
Emerson Electric Co. (EMR) INDUSTRIALS INDUSTRIAL EQUIPMENT & COMPONENTS 100 98.75
Old Dominion Freight Line, Inc. (ODFL) INDUSTRIALS TRUCKING 100 103.75
Republic Services, Inc. (RSG) INDUSTRIALS WASTE MANAGEMENT 100 98.75
The Middleby Corporation (MIDD) INDUSTRIALS DIVERSIFIED MACHINERY 100 101.25
Kforce Inc. (KFRC) INDUSTRIALS STAFFING & EMPLOYMENT SERVICES 100 95
AMETEK, Inc. (AME) INDUSTRIALS INDUSTRIAL ELECTRICAL EQUIPMENT 95 97.5
Deere & Company (DE) INDUSTRIALS FARM & CONSTRUCTION MACHINERY 95 93.75
Illinois Tool Works Inc. (ITW) INDUSTRIALS DIVERSIFIED MACHINERY 95 97.5
REITS
Iron Mountain Incorporated (IRM) REITS REIT-SPECIALTY 90 88.75
Prologis, Inc. (PLD) REITS REIT-INDUSTRIAL 85 86.25
CorePoint Lodging Inc. (CPLG) REITS REIT-HOTEL & MOTEL 85 67.5
Independence Realty Trust, Inc. (IRT) REITS REIT-RESIDENTIAL 85 65
Equinix, Inc. (REIT) (EQIX) REITS REIT-SPECIALTY 80 81.25
Global Net Lease, Inc. (GNL) REITS REIT-OFFICE 80 82.5
Monmouth Real Estate Investment Corporation (MNR) REITS REIT-INDUSTRIAL 80 81.25
PennyMac Mortgage Investment Trust (PMT) REITS REIT-MORTGAGE 80 80
SERVICES
Churchill Downs (CHDN) SERVICES GAMBLING 110 112.5
Americas Car Mart (CRMT) SERVICES AUTO & TRUCK DEALERSHIPS 105 102.5
Group 1 Automotive, Inc. (GPI) SERVICES AUTO & TRUCK DEALERSHIPS 105 102.5
Equifax Inc. (EFX) SERVICES CONSULTING SERVICES 100 101.25
Vail Resorts, Inc. (MTN) SERVICES RESORTS & CASINOS 100 93.75
GameStop Corp. (GME) SERVICES SPECIALTY RETAIL 100 100
Booz Allen Hamilton Holding Corporation (BAH) SERVICES CONSULTING SERVICES 95 98.75
Brunswick Corporation (BC) SERVICES LEISURE 95 96.25
CarMax, Inc. (KMX) SERVICES AUTO & TRUCK DEALERSHIPS 95 97.5
Comcast Corporation (CMCSA) SERVICES ENTERTAINMENT 95 98.75
TECHNOLOGY
Fortive Corp (FTV) TECHNOLOGY SCIENTIFIC & TECHNICAL INSTRUMENTS 105 103.75
Black Knight, Inc. (BKI) TECHNOLOGY SOFTWARE-INFRASTRUCTURE 100 103.75
Guidewire Software, Inc. (GWRE) TECHNOLOGY SOFTWARE-APPLICATION 100 98.75
Open Text Corporation (OTEX) TECHNOLOGY SOFTWARE-APPLICATION 100 102.5
Palo Alto Networks, Inc. (PANW) TECHNOLOGY SOFTWARE-INFRASTRUCTURE 100 100
Verizon Communications Inc. (VZ) TECHNOLOGY TELECOM SERVICES 100 91.25
Coupa Software Incorporated (COUP) TECHNOLOGY SOFTWARE-APPLICATION 100 103.75
Fastly, Inc. (FSLY) TECHNOLOGY SOFTWARE-APPLICATION 100 102.5
Gogo Inc. (GOGO) TECHNOLOGY TELECOM SERVICES 100 88.75
ANSYS, Inc. (ANSS) TECHNOLOGY SOFTWARE-APPLICATION 95 98.75
UTILITIES
Brookfield Infrastructure Partners L.P. (BIP) UTILITIES UTILITIES-DIVERSIFIED 90 81.25
Brookfield Renewable Partners L.P. (BEP) UTILITIES UTILITIES-RENEWABLE 85 88.75
CenterPoint Energy, Inc. (CNP) UTILITIES UTILITIES-REGULATED GAS 85 82.5

Never miss a money-making idea. Get all the ideas we sent to members this week, plus weekly large cap, mid cap, small cap and ADR rankings. Know what sectors, industries, and stocks to buy and when to buy them. Over 400 bps of excess return in the following 52 weeks since 2017. Free trial, special introductory pricing, and you can cancel anytime. Join the conversation. Sign up for Top Stocks For Tomorrow.

Disclosure: I am/we are long IGV, TSLA, SHOP, ZM, AAPL, AMGN, DXCM, INSP, FSLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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IBM says U.S. should adopt new export controls on facial recognition systems By Reuters


2/2
© Reuters. A man wearing a protective mask walks past an office building with IBM logo amidst the easing of the coronavirus disease (COVID-19) restrictions in Sydney

2/2

By David Shepardson

WASHINGTON (Reuters) – IBM Corp (N:) said on Friday the U.S. Commerce Department should adopt new controls to limit the export of facial recognition systems to repressive regimes that can be used to commit human rights violations.

The company said in a statement the United States should institute new export limits on “the type of facial recognition system most likely to be used in mass surveillance systems, racial profiling or other human rights violations.”

In July, the Commerce Department had sought public comments on whether to adopt new export license requirements for facial recognition software and other biometric systems used in surveillance. Comments are due by Sept. 15.

Christopher Padilla, IBM’s vice president for government and regulatory affairs, told Reuters the U.S. government should focus on “one to many” systems that could be used to pick dissidents out of a crowd or for mass surveillance, rather than “facial identification” systems that allow a user to unlock an iPhone or board an airplane.

IBM said the Commerce Department should control “export of both the high-resolution cameras used to collect data and the software algorithms used to analyze and match that data against a database of images” and argued it should “limit the ability of certain foreign governments to obtain the large-scale computing components required to implement an integrated facial recognition system.”

The company’s written comments did not identify specific governments but said “controls on the most powerful types of facial recognition technology should be focused on those countries that have a history of human rights abuses.”

The Commerce Department’s July notice said China “has deployed facial recognition technology in the Xinjiang region, in which there has been repression, mass arbitrary detention and high technology surveillance against Uighurs, Kazakhs and other members of Muslim minority groups.”

The department has added dozens of Chinese companies and entities to an economic blacklist that it said were implicated in human rights violations regarding China’s treatment of Uighurs, including video surveillance firm Hikvision (SZ:), as well as leaders in facial recognition technology SenseTime Group Ltd and Megvii Technology.

China has denied mistreating people in Xinjiang.

IBM said the Commerce Department should also restrict access to online image databases that can be used to train facial recognition systems.

In June, IBM told the U.S. Congress it would stop offering facial recognition software and opposes any use of such technology for purposes of mass surveillance and racial profiling. The company also called for new federal rules to hold police more accountable for misconduct.

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The current sell-off may end up emboldening the bulls, if the last tech bubble is a guide


The bubble isn’t burst yet.


Justin Edmonds/Getty Images

Traders at the moment seem to have as much patience with tech stocks as Kansas City Chiefs fans do for a moment of unity.

Thursday was the fourth ugly finish in five sessions, with the Nasdaq Composite
COMP,
-1.99%

skidding 2%, and the other major indexes backtracking as well.

Andrea Cicione, head of strategy at independent investment research firm TS Lombard, said excessive leverage in the market really began in earnest in July. Cicione added that was occurring in U.S. stocks wasn’t happening anywhere else in the world.

And while he’s seeing signs of a bubble, he thinks if the selling doesn’t intensify, the bubble may reflate soon.

“The leverage accumulation so far may not be enough to burst the bubble just yet,” he writes. “If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk.”

Between 1997 and 1998, the Nasdaq experienced three sell-offs of at least 17%, only to emerge stronger and rise four-fold to the 2000 peak. “Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet,” he says.

The reason leverage is important in bursting bubbles is because it uniquely can lead to forced unwinding. “When faced with margin calls they cannot meet, investors may have to liquidate positions against their will. The resulting fall in prices can instil doubts in the mind of others, persuading them to sell,” he said.

The buzz

Consumer price data for August is due at 8:30 a.m. Eastern.

The quarterly services survey and August budget deficit are also due for release. The Congressional Budget Office, which typically gets the budget picture pretty close to the mark, estimated the August deficit was $198 billion, and said the September-ending fiscal year gap will be the highest relative to the economy since 1945.

Database software giant Oracle
ORCL,
+0.66%

topped earnings and revenue expectations, helped by revenue from key client Zoom Video Communications
ZM,
-1.32%
.
Oracle also declined to discuss whether it will buy the U.S. operations of social-media company TikTok, as U.S. President Donald Trump said Thursday there will be no extension of the Sept. 15 deadline for it to be sold to a U.S. company or shut.

Peloton Interactive
PTON,
-3.75%
,
the exercise bicycle company, reported stronger-than-forecast fiscal fourth-quarter earnings and revenue, with its current year outlook also well ahead of estimates.

Jean-Sébastien Jacques, the chief executive of mining giant Rio Tinto
RIO,
-1.67%
,
announced he will resign in March following the controversy over the firm blowing up ancient caves while excavating for iron ore.

Thursday marked the first day since spring when new coronavirus cases in the European Union and the U.K. exceeded the United States.

The market

U.S. stock futures
ES00,
+0.65%

NQ00,
+0.64%

were stronger.

Gold futures
GCZ20,
-0.46%

fell while oil futures
CL.1,
+0.21%

edged higher.

The British pound
GBPUSD,
+0.18%

continues to reel from its more combative stance taken against the European Union in trade negotiations.

The chart

This incredible UBS illustration of Tesla
TSLA,
+1.38%

shows how shares have performed compared to other tech giants since joining the $100 billion market cap club. It took Apple
AAPL,
-3.26%
,
Alphabet
GOOGL,
-1.36%

and Facebook
FB,
-2.05%

between 4 to 11 years to achieve what Tesla did in three quarters. UBS increased its Tesla price target to $325 from $160 ahead of the company’s battery day presentation.

Random reads

Here’s the 2010 memo from a venture capital firm on an investment which valued retail software maker Shopify at $25 million. Shopify
SHOP,
-1.59%

is now worth $114 billion.

China said its U.K. ambassador’s Twitter account was hacked — after a steamy post was liked.

An experimental treatment kept mice strong in space, one that could have uses back on Earth.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.



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Vanguard Mid Cap ETF: Cheap Valuations And High Quality (NYSEARCA:VO)


In this world nothing can be said to be certain, except death and taxes. – Benjamin Franklin

The Vanguard Mid Cap ETF (VO), a fund that is focused on mid-cap US stocks, has not been loved in recent years. It has had an impressive Covid-recovery, finally turning positive for the year, but remains below all-time highs made in February. Of course, this is not new for mid-cap investors. In the last three years, despite overwhelmingly positive equity markets and a risk-on sentiment, mid-caps have outperformed large caps, as measured by the Vanguard S&P 500 ETF (VOO). And by a significant amount, with a gain of 47.29% for the latter in the last 3 years to a gain of only 29.38% for the former.

Looking at the holdings of the ETF, the top 10 holdings account for only 8.1% of the portfolio, as much of the company-specific risk has been diversified away. Sector-wise, the holdings are balanced, with the top 3 sectors being Technology (21%) Financials (20.6%), and Industrials (15.3%). That gives a nice balance to the ETF in growth industries and value industries, which lets you hedge out the bet on which strategy will win out over the long term after more than a decade of growth stocks flourishing. Eventually, value investing can return, and you will have exposure to those types of companies with this holding.

Source: Vanguard

Thoughtful Selections

While the Covid crisis has many challenges for the mid-cap space, the portfolio has some excellent picks. For example, Lululemon Athletica Inc (LULU) is in a unique position, as their demand has likely increased with more consumers looking for comfort while working from home, a trend that the athleisurewear company has been excellent at capitalizing on. DexCom Inc. (DXCM) recently smashed earnings expectations in late July, with revenues gaining 34%, and earnings up a whopping 541%. SBA Communications (SBAC) managed to keep their dividend and beat FFO by $0.45, also beating on revenues, in their recent earnings report as more internet was used during the stay at home period. These, among other mid-cap plays, are extremely interesting in the ability to pivot and capitalize in a poor economy and should rebound stronger if the economy can continue its up leg.

Potential Risks

  1. If the economic recession is worse than thought, mid-caps may not have enough resources to weather the storm. Bankruptcies have been happening at an increased rate, especially when you go down the capitalization ladder, and could pose trouble throughout the rest of 2020 and into 2021, especially if government stimulus fails to gain traction in Congress. Many of these companies depend on a strong consumer.
  2. The dividend yield of VO could be under pressure here, especially if there is some movement on the political side to halt buybacks and shareholder payouts. While this remains a far-off risk, it is not implausible, and should be discounted as a risk when investing in these companies. With balance sheets that are inferior to larger-cap companies, there could be more pressure to keep free cash flow for future economic pullbacks and/or business pressure, lowering the dividend yield.
  3. This holding has 357 holdings currently, with a median market cap of $18.9 billion. While you are not going to be worried about diversification, you may suffer the effect of over-diversification with that many holdings. There have been studies done that say the proper amount of holdings for accurate diversification should be around 20-50 holdings only – at 357, the number is much higher.
  4. General market risk remains high after a Federal Reserve (Fed) fueled rally in 2020 off the March lows. If the Fed fails to stoke inflation, or they do not provide enough stimulus, stock markets are at risk of another major pullback. We saw some of this in the price action in early September, when tech stocks spurred a significant decline.

The ETF VO, and its underlying holdings, have shown a great ability to weather a downturn in the recent months. Although valuations remain elevated, at 25.3x P/E, the earnings growth rate of 13.7% should make up for that level over time. This is a great fund to get domestic exposure, as its foreign direct exposure remains 0%, and with a relatively low turnover of 15.2%, you should be comfortable holding this ETF long term.

While highly diversified, there are enough excellent ideas within the portfolio that can push the ETF to new highs, eventually. Whether the overall economy and markets remain in their uptrend is a huge question, but if you are looking for a 10- to 20-year investment, VO fits the bill. The nimbleness of mid-caps should allow them to adjust to the new normal economy, and if there is progress on a vaccine in late 2020 or early 2021, many will flourish.

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