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FBB's Bailey Likes Consumer Staples, Looking at Tobacco (Audio) · Bloomberg Intelligence

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  Speaker 1: I'm Charlie Pelotadal. The SMP nezdak all declining thirteen minutes
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  Speaker 1: Disney and Macy's raising downs about the strength of the
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  Speaker 1: US consumer. We get retail sales numbers Friday morning today,
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  Speaker 1: report returned to Catherine cadreye As A search for investments
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  Speaker 1: recommending mortgage real estate investment trusts in their e t
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  Speaker 1: F form At a conference last week. Unlock called buying
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  Speaker 1: mortgage read e t F s a no brainer. Bloomberg
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  Speaker 1: intelligence analyist Eric do Tunis sounds a cautionary note. Keep
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  Speaker 1: in mind this is not your grandfather's read. These aren't
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  Speaker 1: companies that hold real estate and properties and physical properties. Instead,
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  Speaker 1: says bell Tunis, these are financial firms that land out
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  Speaker 1: at short term rates and then buy mortgage securities at
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  Speaker 1: the long term rates, so they make money on the
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  Speaker 1: spread between the two rates. The biggest has a twelve
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  Speaker 1: month dividend yield of ten point nine But there's a
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  Speaker 1: caveat Mortgage reads are sensitive to interest rates, especially an
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  Speaker 1: increase in short term rates. So if that goes up
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  Speaker 1: and the FED raises rates, this thing always gets killed
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  Speaker 1: when the Fed sounds like they're going to raise rates.
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  Speaker 1: So this is you know, this is a difficult thing
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  Speaker 1: to maneuver around the Fed. You got to be very careful.
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  Speaker 1: The biggest the I shares, MORTGAD real Estate CAT ETF,
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  Speaker 1: has total assets of nine one million dollars. That's your
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  Speaker 1: Bloomberg ETF report. I'm Catherine Cowlery. This is taking stock
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  Speaker 1: with Kathleen Hayes and Pim Fox on Bloomberg Radio. So
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  Speaker 1: far this year, the sm P five hundred has produced
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  Speaker 1: a return of one point two percent. The dividend yield
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  Speaker 1: is two point two percent. Here to help us make
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  Speaker 1: sense of this and what to do with our money,
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  Speaker 1: is Mike Bailey, Director Research at F b B Capital Partners,
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  Speaker 1: helping to manage eight hundred and fifty million dollars. Joining
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  Speaker 1: us from Washington, d C. Home to Bloomberg one and
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  Speaker 1: one oh five point seven h D two F M.
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  Speaker 1: Mike Bailey, give us your strategy your thesis right now
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  Speaker 1: for investments, given uh, the paltry returns that people can
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  Speaker 1: expect by investing in bonds, but also it seems the
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  Speaker 1: performance of the stock market this year. Absolutely and thanks
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  Speaker 1: to Pam and Kathleen for having me back on. So yeah,
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  Speaker 1: in terms of taking a look at the markets and
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  Speaker 1: kind of what would we expect for perhaps the remainder
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  Speaker 1: of the year, I would think it's going to be
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  Speaker 1: you know, kind of load of mid single digit returns.
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  Speaker 1: That's kind of what we've seen year to date, although
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  Speaker 1: it's certainly been a bit of a roller coaster. But
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  Speaker 1: you know, we look at if you sort of strip
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  Speaker 1: out energy and some some parts of the market that
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  Speaker 1: have happened they're having a tough time. Uh, you know,
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  Speaker 1: I think just look at earnings growth. Then you know,
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  Speaker 1: you call it mid single digit. You've got some companies
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  Speaker 1: with some nice dividend yields that gets you kind of
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  Speaker 1: mid to high single digit it um. I think that's
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  Speaker 1: that's a fairly reasonable sort of yardstick in terms of
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  Speaker 1: what to expect for for the full year. So might
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  Speaker 1: might not be too exciting for the last last a
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  Speaker 1: few months, but I think, you know, we may end
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  Speaker 1: a year sort of look back at maybe a five
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  Speaker 1: seven percent return for the full year, which was roughly
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  Speaker 1: in line with what you've seen historically. Let's check some
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  Speaker 1: factors off the list, and of course I'll start with
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  Speaker 1: the FED, because I'm such a Fed nerd Is it
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  Speaker 1: kind of asymmetric at this point? If the Fed doesn't
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  Speaker 1: raise rates until the end of the year, if at all,
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  Speaker 1: does that not help stocks much because it's kind of
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  Speaker 1: priced in right now and people are doubting the federal move.
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  Speaker 1: Whereas the Feds surprises all the people who don't think
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  Speaker 1: they're going to move in June and does raise the
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  Speaker 1: key rate again, would that be detrimental to stocks great point?
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  Speaker 1: You know, I think, you know, you could argue that
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  Speaker 1: that's kind of a you're looking at probabilities to think
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  Speaker 1: investors right now are thinking there's a very low probability
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  Speaker 1: of a rate hike UM, and say if that does happen,
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  Speaker 1: I think there's a there's some validity there. So especially
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  Speaker 1: if you get you know, two or maybe three hikes UM,
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  Speaker 1: certainly I think that that would keep a lid on stocks.
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  Speaker 1: But I think at this point, just looking at at
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  Speaker 1: the data it's been coming out my my sense. I
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  Speaker 1: guess I tend to go along with with some of
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  Speaker 1: those other broader views that were like unlikely to see
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  Speaker 1: a hike for a while. I think, you know, as
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  Speaker 1: we get into election season, although they said that tries
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  Speaker 1: to be separate from from politics and such, you know,
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  Speaker 1: we may see them pushed until after the election. Perhaps
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  Speaker 1: you'll see a ray hike in November or December. And
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  Speaker 1: I think even with that kind of upside and downside
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  Speaker 1: sort of scenarios we're talking about, I think there's still
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  Speaker 1: room for equities to move up another three or four
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  Speaker 1: in the back half the year. Well, equities have moved
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  Speaker 1: up what about twelve thirteen percent since that drop that
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  Speaker 1: took place I guess the middle of February. Can you
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  Speaker 1: explain what you would be putting the money into now
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  Speaker 1: if you believe, first of all, that the market is
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  Speaker 1: going to continue to perform as it has at least
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  Speaker 1: since the end of February. Certainly so, our our client
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  Speaker 1: base is a little bit more on the lower end
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  Speaker 1: of the risk return a curve, so uh, you know,
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  Speaker 1: with that kind of in mind, we typically would look
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  Speaker 1: a little bit more towards some of the defensives, although
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  Speaker 1: you know, when I say defensive, we've got some kind
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  Speaker 1: of more aggressive picks within that that sort of theme. So,
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  Speaker 1: you know, in general, healthcare is the name that that
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  Speaker 1: we like, although within that we've certainly got some high
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  Speaker 1: growth of biotech. We've got you know, HMOs for example,
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  Speaker 1: that those are pretty interesting. United Health has done well.
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  Speaker 1: We think that that continues. UH. And there's some others
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  Speaker 1: in there, for example, even a Shire, which is a
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  Speaker 1: company that's a fairly high growth and certainly has moved
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  Speaker 1: around a bit, but I think that one's got some
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  Speaker 1: acquisitions that could drive it. UH. Some other areas that
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  Speaker 1: we're looking at utilities and certainly one of the UH
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  Speaker 1: more kind of slow moving sectors traditionally, although it's had
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  Speaker 1: a great run. We still like utilities for the back
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  Speaker 1: half of the year, although we're trimming a bit following
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  Speaker 1: the out performance we've seen here to date. UH. And
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  Speaker 1: then another couple of areas again we're looking at the
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  Speaker 1: consumer space UM. Despite kind of the carnage we've seen today,
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  Speaker 1: I think more in the consumer discretionary side, we're a
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  Speaker 1: little more interested in this apples a business, so m
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  Speaker 1: you know, we like you know, sort of if you
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  Speaker 1: want to call it the baby large caps Clorox and
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  Speaker 1: Church and Dwight for example, those those look pretty interesting. Um.
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  Speaker 1: Even tobacco names, uh look look pretty interesting, especially yield.
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  Speaker 1: Can I ask you about tech stocks textings with long
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  Speaker 1: growth tails? Absolutely so one of the areas that I mean,
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  Speaker 1: I sort of started out with some more of the
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  Speaker 1: defensive sides, but in tech we're still a bit sort
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  Speaker 1: of below weight in tech, we're looking to add some things.
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  Speaker 1: One of the areas we're looking at is cybersecurity, and
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  Speaker 1: that that's certainly all over the news, but our senses
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  Speaker 1: looking at some of the companies that are growing a
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  Speaker 1: little more quickly, and I think basically looking at market penetration.
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  Speaker 1: One of the names that we've looked at is pala
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  Speaker 1: Alto Networks. UM. Certainly uh, pretty high growth company. But
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  Speaker 1: basically they they've given some interesting clues um for example,
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  Speaker 1: a recent investor meeting and if you sort of triangulate
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  Speaker 1: what they're talking about. UM, as long as people keep
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  Speaker 1: spending money on cybersecurity, which in our minds is kind
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  Speaker 1: of just attacks on business these days. Uh, and a
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  Speaker 1: company like a pile out the networks continue to gain share,
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  Speaker 1: I think it looks pretty interesting, and you do have
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  Speaker 1: to go out a few years, but as long as
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  Speaker 1: they keep tracking towards the market share goals, companies like
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  Speaker 1: that looks pretty compelling. I mean you could put certainly
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  Speaker 1: five even ten years of a sort of long growth
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  Speaker 1: tail on a business like that. Mike, what is some
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  Speaker 1: of the common questions that you're being asked by your
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  Speaker 1: customer base? Yeah, I think one of the bigger ones
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  Speaker 1: is just valuations. So you know, we take a look
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  Speaker 1: at the SMP for example, I think on on our
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  Speaker 1: metrics of training about eighteen times earnings, that's basically the
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  Speaker 1: recent high. So if you go back, you know, a
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  Speaker 1: year or two, that's that's kind of where we are.
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  Speaker 1: And the question is, you know, where do we go
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  Speaker 1: from here? Um So I certainly would agree that that
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  Speaker 1: I think I mentioned earlier keeps a bit of a
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  Speaker 1: lid on on equities. UM I think we're unlikely to
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  Speaker 1: see a repeat of kind of the glory days of
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  Speaker 1: twenty twelve, thirteen or fourteen, but I think you're likely
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  Speaker 1: see a bit more out performance here. You know, again,
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  Speaker 1: just very nice sort of beating and raising by a
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  Speaker 1: lot of companies. You've got some nice growing dividend deal
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  Speaker 1: and that type of thing. Uh, And I think that
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  Speaker 1: can keep you know, multiples of continuing a bit higher.
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  Speaker 1: The flip side here, we haven't quite talked about bonds yet,
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  Speaker 1: but really, you know, if you're looking to get some
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  Speaker 1: fairly stable returns, and bond yields are really just almost
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  Speaker 1: you know, essentially negligible, you can look at some high
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  Speaker 1: qualities equities and get some very nice dividendnields there. And
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  Speaker 1: I think investors may see flow funds continuing into equities
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  Speaker 1: that can drive theres a bit higher. Even some bond
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  Speaker 1: guys say that big dividend payers are the new the
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  Speaker 1: new bonds, right, So speaking a little yields though, do
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  Speaker 1: you see broadly are you strictly um sticking to a
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  Speaker 1: US centric strategy, any opportunities you consider overseas? Yeah, I
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  Speaker 1: think in general we are askewed a bit more to
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  Speaker 1: the US and developed markets, but that we're certainly keeping
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  Speaker 1: our eyes wide open, uh, you know, to two opportunities outside.
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  Speaker 1: I think certainly other developed areas. Europe. A lot of
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  Speaker 1: folks are are pointing there. We own a few individual
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  Speaker 1: equities based in Europe, so I think we've got a
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  Speaker 1: bit of a toe hold. They're still a little a
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  Speaker 1: little bit of concern. Yeah, I think, um, you're just
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  Speaker 1: a lot of issues there. Demographics, you've got immigration, you've
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  Speaker 1: got currency maybe going against Europe this year as opposed
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  Speaker 1: to being a tail win last year. So some concerns
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  Speaker 1: in Europe. Um other areas, China certainly lots of volatility there.
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  Speaker 1: We're still a bit cautious on China. We we tremmed
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  Speaker 1: our positions last year where we're not quite ready to
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  Speaker 1: jump back in the water at this point. But do
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  Speaker 1: you want to be wide open. You know, it could
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  Speaker 1: be some opportunities and it could be some areas to
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  Speaker 1: take a look at. But I think what we're still
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  Speaker 1: a bit more cautious at this point. All right, Mike Bailey,
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  Speaker 1: thank you so very much for joining us today. He is,
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  Speaker 1: of course, director of Research and see f A at
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  Speaker 1: f BB Capital Partners uh EITHER in fifty million dollars
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  Speaker 1: of assets under management, located in the nation's capital, Washington,
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  Speaker 1: d C, home of Bloomberg One. What has certainly been
• 10:54
  Speaker 1: an interesting day in the stock market. Almost every retailer
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  Speaker 1: in the country getting pounded, except up for the giant
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  Speaker 1: online retailer whose name you know so well. Dave Wilson
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  Speaker 1: way back, our stocks editor to look at movers and shakers.
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  Speaker 1: I'm caffeine Haze, along with Pim Fox taking stock on
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  Speaker 1: Bloomberg Radio