To The Moon

According to Richard Bernstein, CIO of Richard Bernstein Advisors, a $16 Billion asset manager - all investors should brace for a big investing opportunity that's about to come for stocks.

It is not in an area of the market; investors may be expecting.

Arguments.

While the Magnificent 7 mega-cap firms have dominated the S&P 500's gains in 2023, less high-profile stocks are now primed to see big returns over the next decade. 

Coming pendulum swing in market leadership is a "once-in-a-generation" buying opportunity brewing among forgotten & under-loved areas of the market,

This he said is similar to a period like the 2000s, when the biggest leaders in the S&P 500 shed value while underdog sectors like energy and emerging markets saw "monster” returns.

Counter argument logic is:

"Despite profits growth becoming more abundant, investors generally continue to focus on the so-called Magnificent 7 stocks.

Such narrow leadership seems totally unjustified and their extreme valuations suggest a once-in-a-generation investment opportunity in virtually anything other than those 7 stocks," he wrote in a note this week.

What makes this time different ?

His expectation for a stock boom isn't to be mistaken with something like the two years of the pandemic market rally, which featured narrow leadership by so-called reopening names, similar to what's now happening with the Magnificent 7.

His thesis hinges on:

1. A broader swath of the market getting a lift by a resilient economy.

2. A surging corporate profitability.

Paradigm questions (to ponder over):

• Are there really only seven growth stories in the entire global equity market?

• Are these seven really the best (?) growth stories in entire global equity market?

His replies — an emphatic “No”.

Fact:

Of the 130 US companies that saw at least 25% earnings growth in the 12 months through October 15, $Amazon.com(AMZN)$ was the only Magnificent 7 stock represented. (see below)

Supporting facts:

• Profits at companies throughout the rest of the market are on the rise, which puts investors in a position to ditch super-expensive mega-cap stocks for more attractively priced shares.

• According to MSCI All Country World Index (ACWI) data, corporate profits look to have hit a trough in 2023 and are heading up into 2024.

RBA analyst added:

• As growth is starting to accelerate, it makes less and less sense to pay a premium for growth.

• History suggests that investors become comparison shoppers for growth as it becomes more abundant, so a movement toward the broader and cheaper market seems consistent with history,

Summary view:

Bernstein predicts:

• The enormous gains enjoyed by mega-cap stocks will be whittled down as investors flock to more attractively priced areas of the market, such as small-cap and mid-cap stocks.

• The Magnificent 7 firms wiping out -20% to -25% of their value while the Russell 2000 gains +20% to +25% over the next decade would be realistic.

• Stocks under the Russell 2000 are so depressed on the other side of the seesaw that you can get huge returns.

• RBA has overweight in virtually every area of the market other than the Magnificent Seven stocks.

Conclusions?

Other forecasters are also pointing to big gains ahead for the broader market.

$Bank of America(BAC)$ analysts said:

• An indicator with a nearly 100% track record is flashing signs that the $S&P 500(.SPX)$ is in for a +16% gain in 2024.

• Historical trends also point to strong profits ahead of investors as the stock market sees a rare bullish pattern of gains and losses this year. 

Russell 2000 - Top 20 US stocks by Market Cap: My first impression

Russell 2000 index - Top 10

Russell 2000 - Next top 10

• Enclosed are the Top 20 US stocks from the Russell 2000 index. (see above).

• Had assumed that stock prices will be “cheaper” than the other 3 indexes. Guessed I was mistaken.

• Like the 3 “main” composite indexes, prefer to zoom in on the “higher” trading volume stocks.

• To invest in any of the Top 20 stocks will entails homework & research definitely.

What is the Russell 2000 index?

• This is a “small-cap” US stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.

• It was started by the Frank Russell Company in 1984.

• The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group (LSEG).

• It is the most common benchmark for mutual funds that identify themselves as "small cap".

• As opposed to the S&P 500 index that is used primarily for large capitalization stocks.

• Interestingly, It is commonly considered an indicator of the US economy due to its focus on small-cap companies in the US market, whose fate depends more on macroeconomic conditions.

Russell 2000 Index - so far:

On Mon, 02 Oct 2023, the Russell 2000 turned negative for the first time in 2023.

This indicated broader weakness in US economy, that is masked by a large-cap tech stocks. 

The small-cap index fell by -1.6% on the fateful day, pushing its YTD performance to a marginal loss of -0.2%.

It was also down -8.38% from its 52-week high. In contrast, the large-cap-focused S&P 500 & Nasdaq Composite were up +11% and +26%, respectively.

Last week (06 Nov to 10 Nov), the RUT has been trending downwards since the start of trading week. (see above)

It managed to recover some lost grounds on Fri, 10 Nov 2023. (see above).

Overall, a weak outlook for $RUT. It is below its 20-day moving average. (see above). Thankfully RUT index still marginally above its 50-day and 200-day ma.

It is only natural that when market sentiments are uncertain, sell-off in the small-cap sector becomes, hardly surprising.

During times of market volatility, investors tend to look for value stocks with:

• Strong balance sheets.

• Significant profit margins.

• Stable business models.

• Growing dividends.

These are characteristics that are not typically found in the Russell 2000 companies. Oops!

Russell 2000 “Cons” include:

• Small caps are more sensitive to the higher interest rate environment.

• Often it is more difficult for small-cap companies to secure loans (working capital) versus larger-cap names that could even negotiate lower lending rates.

• Coupled with the fact that the Russell index has higher sector weight in Financials, making it more leveraged toward interest rate conditions,

With the 10 years US Treasury yields coming off the 5.0% high (after FOMC confirmed interest rate will remain status quo for November 2023), green shoots of recovery have already been sighted before last week’s tumble.

In coming 2024, strategist believes that when the Fed eases pressure on interest rates, the Russell 2000 index will definitely bounce back from its oversold period.

Major index exchange-traded funds (ETFs) that cover US stocks are currently trading at “extreme” oversold levels, could turnaround and set this small-cap index on track to an upward trend.

My Viewpoints:

I am still bullish about Energy stocks.

Now more so than ever, given that the Palestine & Israel warring conflict may lasts for a while longer.

Energy stocks from RUT index Top 20 picks that I hawk over:

• $Antero Resources(AR)$.

• $Southwestern(SWN)$.

• $Range Resources(RRC)$.

• Ovintiv.

No harm picking up new skills, knowledge and expanded homework.

As for Mr Bernstein’s argument and analysis, there’s definitely ounces of truth in his argument.

Like the wolves of Wall Street, I believe fund managers have also positioned themselves for the kill before publishing a glowing “future” stance.

As long as we do our homework prior & diligently and go in with our eyes wide open, should be safe.

Each of us is the captain of our own ship, right.

• Do you think it is worth the time and effort to invest in Russell 2000 stocks?

• Do you think the Top 20 stocks in the small-cap index have attractive valuations?

Please give a “LIKe”, “Share” and “Re-post” ok. Thanks. Rating is very important (to me).

Do consider “Follow me” and get firsthand read of my daily new post/s ok. Thanks.

@Daily_Discussion

@TigerPM

@TigerStars

@Tiger_SG

@TigerEvents

@Qi777 @corsini @gcle @Cichew @menkz