Every now and then I get a nagging feeling to overhaul the portfolio and make wholesale changes, notes Steve Reitmeister, growth and income specialist and editor of Reitmeister Total Return.
Kind of like going to your closet every day and not minding a little bit of clutter. Then one day you can't take it anymore and you re-arrange everything.
In this case, it's not a total overhaul. That's because we have a lot of great stocks and ETFs already onboard. So let's call this more of a mini-overhaul.
The main thing I want to infuse into the portfolio is more economically sensitive stocks like those in the materials space. This is usually the part of the market with the most explosive earnings estimates at early stages of an economic recovery. Indeed that is where we stand now.
• Buy 7% allocation in ArcelorMittal (MT)
• Buy 7% allocation in Huntsman (HUN)
• Buy 7% allocation in Group 1 Automotive (GPI)
• Buy 7.5% allocation in Columbia Sportswear (COLM)
Why buy HUN and MT? We will tackle them together even though they are very different companies. MT is the largest steel maker in the world which is also vertically integrated with iron ore mines. Whereas HUN is a diversified chemicals makers.
Let's start with MT. The world economy is getting back on track. That will lead to more spending on everything. And if you are going to build more of everything, then you need more steel. (End of Story!)
MT is the pick of the litter in steel manufacturing with a global footprint. In a way that is better than just being North American based because many parts of the globe are well behind the US in their recovery. This gives more upside potential for an earnings rebound to propel shares forward.
They are just pounding out beat-and-raise quarters now and I suspect that will be true for quite a while longer. With that shares will likely blow past current target prices of $38-40 to $50 and beyond in next 12 months. That is why I want shares in the fold now.
And yes, MT scores very well on POWR Ratings with an A overall. In fact, it is in the top 1.4% of all stocks in the rating system because Growth, Value, Momentum and Sentiment are all in the top 10%. That is a lot of POWR packed into shares.
As for Huntsman we are definitely taking advantage of the sector rotation out of chemical shares of late. This makes sense given that shares are up well over 100% in the past year and was time for folks to take some profits off the board.
Just like the thesis for MT — if the world economy is rebounding from the coronavirus then we will produce more of everything in the coming year and that equates to more chemicals being purchased. Because chemicals are in just about everything.
HUN is a consistent quality player in the industry. But what really jumps off the page is Value mostly because of the recent sell off.
Not just an A for Value grade, but Wall Street analysts pounding the table that shares should be trading for much higher than the current $28. The average analyst calls for $37. Even better is that the top rated analyst in the industry has a street high target of $49.
Why buy GPI? Big sell off in auto stocks as they all had a big year of growth. However, GPI is racing ahead of the pack with their car sales and have not endured the 20% correction in shares as others in the group.
Why? Because investors see a truly unique story of consistent growth for this auto dealer and don't want to let go of the steering wheel on this investment. This outperformance of the group is likely to last when you see the garage full of strong POWR Ratings.
A rating overall and in the top 2% of all stocks. This is on the back of a gangbuster tandem of A ratings for both Growth and Value (my 2 favorite ratings).
On the growth front they just put up a 25% earnings beat that got analysts scrambling to raise estimates for this year and next. This also helped prop up the value story as analysts now believe shares are worth $224 on average while the 5 Star analyst from Merrill Lynch believes that $305 is it's rightful parking spot. This gives us ample reason to get behind the wheel of these auto dealer shares at the current price closer to $160.
Why buy COLM? I have been in and out of these shares over the years. Just a quality company that consistently produces strong results. Columbia Sportswear is a high profile company — and so there are times it gets fully priced and time to look elsewhere.
I like the story here that people want to get outside more as the coronavirus is fading away as the biggest daily concern. This includes wanting more outside adventures for which their clothing is perfectly suited.
And second the desire to get back to America's favorite pastime — shopping! Both of these trends bode well for a widely respected apparel manufacturer like Columbia.
Quality is where COLM scores the best with the POWR Ratings being at the 94.9 percentile level. Yes, only the top 5% can be A rated. That is why COLM only shows a B on the quote page at this moment. The point is that they are right on the cusp of that top rating which portends well for consistent earnings reports ahead.
Gladly shares have been shaved down from $114 to $100 as part of sector rotation games. This gives us an attractive entry price for shares that analysts believe are worth $125 on average with one top analyst pounding the table that $146 is its rightful destination. Let's zipper up these shares before its too late.
Closing Comments
When all is said and done we are at 100% invested with a great mixture of stocks by industry, market cap, beta and so on. What they have in common is the advantage of the POWR Ratings packed into each stock.
You may be curious why I we have jumped back to 100% long given the volatile state of the market. Yes, there is some risk in that as a pullback or correction could happen at any time.
However, let's remember there is also a risk that given all the bullish catalysts at play that the market can run ahead at any time. So having money in cash is also a risk.
So I am unsure the twists and turns for the market in the days and weeks ahead. But I am very sure that these are quality companies bought at attractive prices that should see upside by years end. And that is why I felt comfortable pushing our chips all in at this time.
