President Biden recently launched his ambitious $2 trillion infrastructure plan. Prior to this announcement, the financial media teemed with suggestions about which companies were poised to benefit from this spending within the infrastructure space. However, on the day of the President announcing the program, the market hardly budged. It appears that the plan was already priced into the market. There is also a current shortage of semi-conductors, but this too is already priced into the stocks.
One of the evergreen market maxims is to “buy on the rumor and sell on the news”. As long-term investors, we feel this is a risky strategy to follow. Instead of trading on short term news and rumors, we advocate for investing based upon long term growth trends and secular themes. To uncover these themes, again, takes diligence and a significant amount of effort.
The market has gotten quite adept at pricing in expectations ahead of time, which underscores the need for creative and diligent investing. Investors must do the hard work to look past what is popularly believed and uncover the hidden opportunities for value. This is a task that few investors are willing to undertake.
One of the biggest myths that investors tend to believe is that a good economy translates into a good market. Let’s start there.
The decoupling of markets and economy
When considering what Biden’s infrastructure plan means for your portfolio, it is important to point out is that markets and the economy do not always move in lockstep. The stock market has a future discounting mechanism and will usually react in anticipation of an event, whether positive of negative. US stock markets made solid gains last year even though the economy had yet to recover from the effects of COVID 19 – but there was an anticipation of strong economic growth following the release of a vaccine.
2021 could turn out to be an excellent year for the economy but possibly less exciting for investors in the stock market. Many popular sectors, especially technology, telecom and work and play “stay at home” stocks are very expensive. All the good news and growth prospects may already be reflected in their stock prices.
Finding hidden opportunities
Thus, from an investment standpoint, we believe it makes sense to look at those stocks or sectors where not all the positive news is priced in yet. Or to look at companies where new initiatives or products are still being ignored.
There are definitely opportunities, but one has to look under the hood and determine where value has not been realized yet.
Here are two examples:
Three years ago, a US car manufacturer was trading cheaply on an absolute basis – with a single digit price to earnings multiple, and a healthy dividend too. What was not priced into the stock was the division devoted to electric vehicles. This has only been realized by the markets recently and the stock has doubled, all within the last few months.
Companies often spin off divisions which are not congruent with their core business strategy. This too is an area to look for hidden value. A good example is from twenty years ago, where a newspaper company owned two cable channels in the DIY space. This part of the business had high growth potential; the stock was hugely misunderstood by the market. Yet only the newspaper business, which was deteriorating slowly, was priced into the stock. In other words, you got the cable stations for free. The value was unlocked when the cable division was spun off into a separate stock, rewarding shareholders who had owned the stock at its original valuation.
We believe there are several other opportunities similarly created by the Biden infrastructure plan, as well as by the economic recovery from COVID – 19 and as per our earlier indications, none of which are implied by anything the media had said or the rumors accompanying the associated news.
Summary on what Biden’s infrastructure plan means for your portfolio
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Norman H. Chait, CFA Managing Principal, Nardis Advisors LLC, April 7th, 2021
Source: Cartoonstock.com CC40562 – artist Mike Twohy – originally published in New Yorker 7/12/1998
Disclaimer: Nardis Advisors LLC (“Nardis”) is a Registered Investment Advisory Firm regulated by the U.S Securities and Exchange Commission in accordance and compliance with applicable securities laws and regulations. Nardis does not render or offer to render personalized investment advice through this medium. The information provided herein is for informational purposes only and does not constitute financial, investment or legal advice. Investment advice can only be rendered after delivery of the Firm’s disclosure statement (Form ADV Part 2) and execution of an investment advisory agreement between the client and Nardis.