Penn Wealth Publishing

2021.01.10 Penn Wealth Report Vol 9 Issue 01

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10 Jan 2021 penn wealth Report volume 9 issue 01 7 Copyright 2021. All Rights Reserved. tactical Awareness Growth stocks have vastly outperformed their value cousins over the past three years; that should change in 2021. e revenge of the cash cows. Had investors been told back in late 2019 that the tech-laden NASDAQ would rise in excess of 40% over the course of the coming year, they would have been both shocked and certain that 2020 would be filled with unbridled economic growth and exuberance. Had they been told, instead, of the coming global pandemic and accompanying lockdowns, they would have projected double-digit losses for the exchange. e gains, which fol- lowed a 30% drop between mid-March and mid-April, were nothing short of remarkable. ese two disparate yet simultaneous conditions—a global pandemic and an enormous tech rally—make a bit more sense when we look at the individual companies which drove the index to new heights: tech firms which allowed Americans to work from home with both ease and a sense of security. However, while we see a new hybrid model of labor sticking around permanently (an in-office, work-from-home mix), it makes sense that the NASDAQ is due some type of pullback in 2021; at least a temporary one. To consider which investments might outperform relative to their peers in the year ahead, we simply need to follow the money. e pent-up desire of individu- als to get out and about will manifest as less Netflix (NFLX $538, PE 87) and more mall visits. Fewer Zoom (ZOOM $337, no PE ratio) meetings and highly increased bar and restaurant patronage. We began acting on this premise in the middle of last year when the situa- tion appeared most dire, picking up the likes of MGM Resorts (MGM $30), Park Hotels & Resorts (PK $16), and Nordic American Tankers (NAT $3), with the latter being a play on a rebound in the shipment of consumer goods. While these investments have paid off handsomely, there are plenty of low multiple earnings machines sitting out there right now; dusty gems being com- pletely ignored by the multitude of buyers entranced by shiny baubles. e accompanying graph shows the wide disparity between growth stocks and value stocks over the past three years. As the mean reversion takes place, investors will want to be strongly positioned in the lagging benchmark. ere are a number of ways to execute on this strategy. One method involves directly buying some of the best out-of- favor names. A second method is to buy a concentrated basket of value stocks. Yet another is to buy the value index ETF. A few of our favorite value plays for 2021. e current zeitgeist is to shun everything dealing with fossil fuels and embrace everything new age. Never mind the fact that the former are still cash cows and most of the latter have yet to turn a profit. We believe 2021 will be a comeback year for oil, and our favorite integrated oil and gas major remains Chevron Corp (CVX $86), which we own in the Penn Global Leaders Club. Over a five-year period, this deep value play is flat, but we could see the shares hitting $100 this year, or 16% above where they now sit. In the meantime, the company's 6% dividend rate is sweet music to the ears of cash- starved income investors. Coca-Cola (KO $52) is a $225 billion global beverage juggernaut. While the company will see a resurgence in sales at a multitude of public venues as the pan- demic restrictions are lifted, it is also a strong play on the global recovery—most of Coke's revenue is generated outside of the US. Smart and aggressive recent moves—like buying the UK's Costa Coffee and bottled water companies Topo Chico, Dasani, and Vitaminwater—high- light the prowess of the management team, led by the adept British business- man James Quincey. Coca-Cola has a dividend yield of 3%, or about double that of the 30-year US Treasury Bond. Drug giant Pfizer (PFE $36) is one of our easiest calls for 2021. With a 4% dividend yield, a strong and improving pipeline, and a low valuation, it is one of the "safest" value plays of the year. While it is a value stock, investors can expect some nice growth in the holding this year. While it may not appear that rate hikes are on the horizon, don't ignore the bank- ing sector in 2021. is beaten-down sector thrives on economic activity and rising rates, which explains the Financial Sector SPDR's (XLF $29) negative 3% return over the past 52 weeks. Not only is economic activity getting ready to explode, we also believe that inflation will force rates to inch up quicker than most expect. US Bancorp (USB $46) should be an excellent way to play the sector's come- back. USB's management team is showing a willingness to move into high-growth markets this year, which should allow the nation's fifth-largest bank to gain market share and move up the leaderboard. e company's 15 PE ratio makes it a solid value pick. e second method for taking advan- tage of value's reversion to the mean in 2021 is to buy a concentrated basket of undervalued names. Here, our current favorite choice would be the ProShares S&P 500 Dividend Aristocrats ETF (NOBL $79). is concentrated fund of around 65 holdings seeks out high-qual- ity companies that not only pay dividends, but have grown them for at least twen- ty-five consecutive years. Most in the fund have increased their payouts for forty years or longer—a quite impressive feat! Some of NOBL's top holdings fit wonderfully with our comeback narra- tive: Federated Realty Investment Trust (FRT $83, 5% yield) owns high-quality shopping centers in large metropolitan markets; food-service distributor Sysco Corp (SYY $73) is poised for a huge comeback as restaurants reopen; VF Corp (VFC $86) designs and produces the branded apparel which fills the shelves of department and specialty stores. For the larger theme of a value come- back, the iShares Core US Value ETF (IUSV $61) makes great sense for 2021.

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