Looking Ahead to 2024: The Investor's Gambit

 

Anya Taylor-Joy in The Queen's Gambit

One of my favorite television programs over the last several years is the limited series The Queen's Gambit, a tale of a young chess prodigy who becomes a world champion chess player. The prodigy here, Beth Harmon (played by Anya Taylor-Joy), lies in bed at night and stares up at the ceiling, where she visualizes a chess board and all of the pieces, which she moves around mentally to plot out her moves, her opponent's moves, and moves after that and after that. The hallmark of a skilled chess player is the ability to see a number of moves ahead--and how her own moves would likely lead to certain moves by her opponent.

Investing is really all about the future, what's going to happen next. In fact, the very act of buying a stock at least signals a belief that there will be a future at all. The past, of course, plays a role here. A long track record of growing revenues, profitability, and increasing dividends may be what calls our attention to a company in the first place. But what forces might be at work to change the trajectory of that past success? If you bought shares of JC Penney at the end of the twentieth century, you'd probably be gnashing your teeth and asking, How did I miss this? On the other hand, if you saw that an online bookseller named Amazon might expand to become the behemoth of retail, or that a mail-order DVD rental company called Netflix might be delivering movies to your television, you would be on the first steps to finding the pot of gold. You would have grasped the multiple moves ahead. No easy task, but a possible one.

Let's take a look at where we have been in the stock market. In March of 2022, the Federal Reserve, under the leadership of Jerome Powell, started raising interest rates in an effort to quell inflation. The Fed was a bit late tending to this, as they had been dismissing inflation then as "transitory." Rising interest rates are anathema for the stock market because, simply put, higher rates reduce the present value of future earnings--and that is what a stock's price is, the discounted present value of future earnings. So that started the roller coaster ride of equity prices, with investors hanging onto every word and nuance from Jerome Powell. 

Now, as of last week, it looks as if the Fed may be achieving the miraculous and much-sought-after "soft landing" for the economy. That means that maybe--just maybe--the Fed has raised interest rates just enough to dampen inflation without overshooting and sending the economy into a recession. We shall see--and hope that Mr. Powell doesn't crash the plane. This is why the market rallied so strongly this past week. We may have the so-called "pivot" in the Fed's interest rate policy, as Powell actually said something about interest rate cuts in 2024. It will turn out to be nothing of a pivot, of course, if inflation re-accelerates and the Fed has to raise rates further to achieve their inflation goals.

What does this mean for our chess game plan for the coming year? Research suggests that some 90% of a stock's performance is due to the movement of the overall market. So even if you pick the perfect stocks, you can still be hammered by a market that is trending down. This latest news from the Fed may mean that the worst is over for the relentless hiking of interest rates that has caused so much investor suffering--maybe as close to a "green light" as we're going to get. So while I won't assume that the market will be overwhelmingly favorable, I will assume that it is no longer downright hostile. And because the market is always looking ahead, if you wait for the Fed to actually start cutting rates, you'll probably miss the boat.

Here are some ideas:

Quanta Services (PWR, $215). I like to find companies that stand to benefit from a clearly identifiable trend. PWR provides comprehensive infrastructure solutions to utility companies and the renewable energy sector. How trendy is that?

Arista Networks (ANET, $238). Since I am so plugged into the financial media, I am surprised that I haven't heard more about this stock. I first bought shares in 2016, at about $22 per share. That makes this stock a "ten-bagger," much sought after but rarely found. They are in the computer networking business.

What these two companies have in common is that they are not what I call "consumer facing." That is, unlike, say, Nike or Coca Cola, you and I don't see their products or buy them directly. That means we have to do a little work to uncover them.

Rising interest rates can be hard on dividend-paying stocks, as the interest return from fixed-income securities provides a rewarding option for investors seeking income. If interest rates stabilize or fall, those dividend payers look more attractive. Some reliable names here include Proctor and Gamble (PG, $146) and Johnson and Johnson (JNJ, $155). The COVID pandemic made me realize that toilet paper is not the commodity that I thought it was--I have to have my Charmin (made by P&G).

Unless you think that 2024 will usher in a new era of world peace, the defense stocks are worth a look. I don't see an "Age of Aquarius" looming on the horizon. If anything, the world is an increasingly dangerous place. Lockheed Martin (LMT, $447) is a name here, with a dividend yield of 2.8%.

The most challenging chess board of all may be the result of the changes that are coming with Artificial Intelligence (AI). Something that is true in investing that does not necessarily hold for other areas of life is that we know the motivation of the players: to make money. (I am stunned at how people often don't acknowledge this core fact of economic life. Make money today, and use your new wealth to change the world tomorrow--not vice-versa.) Skilled management (and they had better be geniuses for all the millions they are paid) will be plotting those chess moves, all with the aim of making their companies more profitable. When it comes to the technology behind AI, NVIDIA (NVDA, $493) is the leader, as they make the complex computer chips making it all work. And we can be certain that NVDA will not start making chocolate chips instead of computer chips. 

While it is understandable and natural for investors to focus on the companies developing the technology, I also want to focus some chess moves on who will benefit from using the technology. That field is wide open. No one thought of Walmart as having anything to do with high-tech, but over the years they have benefitted from using the latest technology. Who is going to use AI to build the next revolutionary "better mouse trap"? That is the investor's gambit.

Life is short. Get Busy. And Merry Christmas!!!

Jim

Disclosure/Disclaimer: My family members and/or I have positions in PWR, ANET, PG, JNJ, and NVDA. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as the advice to buy or sell any security.

Copyright 2023 James Brinkley Taylor, Jr.

Email me with any questions, comments, or feedback:

jbrinkleytaylor@gmail.com

Shop 'Til You Drop

 

According to published statistics, the United States has the highest retail space per capita of any major country in the world. (Reports cite different numbers, depending on measurement methodology, but the end result is always the same, with the U.S. in first position.) This should come as no surprise, since we Americans are big consumers. It is in our DNA to shop and buy things. Consumption accounts for close to 70% of the U.S. economy. Of course, how we shop has changed with the advent of online shopping and its hegemon, Amazon (AMZN, $145). When I shop until I drop it typically means that I am in my bed, snug under the covers, clutching my iPad and making those last clicks on Amazon before I drop--off to sleep, that is.

Two brick-and-mortar companies that seem to be thriving in this fearless new world of shopping are Costco (COST, $607) and TJX Companies (TJX, $88), owing to their respective business models. About ten years ago my wife and I took our two-year-old grandson with us to Costco, and I thought it would be cute to send a picture of us to some of my friends. One friend asked, "Do they sell toddlers at Costco now?" I replied, "Yes, but you have to buy two dozen of them." Yep, Costco is not the place to find a single small container of anything, but if you're looking to stock up on paper towels or toilet paper, this is your spot. We go to Costco about once a month and load up on lots of non-perishables, but we've actually started ordering our paper products through their Website. Costco is also where we buy our Christmas tenderloins. TJ Maxx stands out because they buy merchandise that didn't sell at other stores, which means that their inventory is constantly changing--a nice ploy to get customers into the stores. What Costco and TJX share in common is less expensive merchandise.

None of this is news to anyone who does any shopping, but the point here is to distinguish between companies that might be worthy of our investment dollars and those that are not. One of the main reasons I don't want to invest in Macy's (M, $16.70) or any other of its ilk is that they simply have too much space. And there is really no compelling need for all of that space in a time when you can find just about anything that would make your heart happy online.

Now think about the upsurge of crime we are witnessing in Memphis and you have yet another reason to sit by the fireplace in your pajamas and click away to your heart's (if not your wallet's) delight. When the Oak Court Mall opened in Memphis in 1988, it was quite the upscale place to shop. The Mall of Memphis opened in 1981 and never had the panache of Oak Court--and was dubbed the "Mall of Murder" before it closed in 2003 and demolished in 2004. Indoor malls, Oak Court being the current example, seem to have acquired the "cesspool" curse, attracting those elements of our society that are bringing mischief and mayhem to the retail experience. Some people may still insist on having the mall experience. Well, I say knock yourself out. Or wait until some mugger knocks you out in the parking garage. Now that is shopping until you drop.

Some people criticize Amazon and accuse it of being a monopoly. That is nonsense. Where are the higher prices? Where are the barriers to entry? Some people (a friend of mine calls them "The Haters") just don't like to see anyone or any business be too successful. This is the "every kid should get a trophy" mentality. A pharmaceutical company that develops and patents a unique life-saving drug is a monopoly, for a time. That is not Amazon, where my last purchase was bars of Dial soap, which I could buy anywhere. The Haters will resent Amazon for its success, but where is the harm to the consumer? I imagine the haters grinding their teeth at Amazon's success while blithely clicking away to buy their kids the latest video game.

As for the surfeit of retail space, one area likely to be spared the suffering are the smaller, boutique specialty shops. My wife owns The Pink Door, the Lily Pulitzer Signature Store here in Memphis. She has about 1,600 square feet, just enough to showcase her inventory of merchandise. For shoppers who want to touch and feel or try on the clothing, this type of brick-and-mortar store fits the bill. The people who work in these smaller shops tend to be friendlier and more helpful than their mammoth store counterparts. Guess why--it's because you are likely to encounter the owner, the one who has skin in the game. I am finding more and more people who work in stores of the big corporate chains to be ignorant about the merchandise and downright surly. They exude the sense that they really don't want to be there and really don't care.

My plan? Shop local, shop small. Otherwise I'll put on my pajamas and fill up my Amazon cart. Groucho Marx once quipped: "I once shot an elephant in my pajamas. How he got in my pajamas I'll never know." I am finding that there is a lot I can get done in my pajamas. Bernstein, an investment firm, just named Amazon as one of its top stock picks for 2024. I'll stick with it, as the move to online commerce just keeps rolling along.

Life is short. Get busy.

Jim

Disclosure/Disclaimer: My family members and/or I own shares of AMZN, COST, and TJX. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as the advice to buy or sell any security.

Copyright 2023 James Brinkley Taylor, Jr.