- Jason Brady, CEO at $41 billion Thornburg Investment Management, believes that the market will experience higher volatility leading into the elections and year-end driven by economic and political uncertainty.
- As such, he has recommended clients to hold an above-average level of cash in their portfolios to prepare for the ‘bountiful buying opportunities’ ahead.
- The investment executive also shared his top sector bets and stock picks to play this market.
- Visit Business Insider’s homepage for more stories.
At a time when retail investors — from Gen-Z to retirees — have flocked to the stock market in droves to put money to work, Jason Brady has a contrarian recommendation to his clients.
“You want to hold more cash than you would otherwise,” said Brady, CEO of the $41 billion money manager Thornburg Investment Management.
“If you believe there’s higher volatility, cash has a very high option value,” he told Business Insider in an interview. “You can turn cash into anything but you can’t turn anything into cash.”
Brady, of course, believes that volatility will increase heading into the elections and persist afterwards.
“What we saw in March was you couldn’t turn much into cash,” he said. “I believe that those kinds of flash liquidity events and real market volatility events are very much a function of the market structure we have today, therefore are very likely to continue to occur.”
While cash is king for investors in a volatile environment, Brady is by no means asking them to sit on the sidelines by maintaining an above-average level of cash in their portfolios. Rather, the idea is perhaps best summarized by one of Warren Buffett’s famous quotes: “Be fearful when others are greedy. Be greedy when others are fearful.”
As volatility endures, “buying opportunities will be bountiful,” Brady said, noting that he finds more value in the so-called “old economy names.”
“The last couple of years, the stocks that have done the best are the ones that are the most expensive, and the stocks that have done the worst are the ones that are least expensive,” he said. “So hyper-growth names have done better and that’s all good. But there are names with the cash flows that are paying you.”
Sector plays and stock picks
From that standpoint, he likes the financials and telecom sectors for their solid fundamentals, low valuations, and high dividend yield.
“Everybody’s fighting the last war, so large-cap money center banks are looking at credit losses. But their consumer balance sheet is very healthy and large banks have a pretty solid loan book,” Brady explained. “They’ve taken provisions but their provisions haven’t been that bad and their actual loss history hasn’t been as bad.”
“These are banks with a very different balance sheet than they had 12 years ago,” he added. “They are providing interesting returns albeit low yield certainly hurt them. And they’re not very aggressively valued.”
Within financials, Brady likes European insurance company NN Group.
“Its P/E today is 7 and its yield is over 7%, so this is significantly cheap,” he said. “Its adjusted earnings for 2020 was down 34% so it’s been beaten up. But if you just want to stick to 2021 estimates for GAAP earnings of 23% … you see a pretty nice earnings progression from here, and the dividend has been rising in the last five years at a 20% rate.”
Another more off-the-beaten-path financials stock that Brady likes is CME Group.
“This isn’t a super cheap stock so the P/E is about 24,” Brady said. “Their big business effectively is the exchange business where people were trading the Fed futures as they were hedging volatility in the front end.”
“So now obviously the front end has been shot by the Fed, but there are lots of other markets to trade in,” he said. “If you believe that there’s higher volatility or high volatility, volumes that go through CME Group will not only be high but continue to be pretty significant.”
The company’s consistent dividend policy is another reason why Brady is positive on the stock.
“In general they do a pretty nice regular cash dividend which has actually grown pretty significantly over the last little while,” he said. “And then they do a special cash dividend in December, a little holiday gift for everybody.”
Brady has also found bargains in the telecom sector, which he believes has benefitted from the COVID-induced work-from-home environment.
“The earnings of those telecom companies on a global basis have been great. They’ve been higher but the stocks have been really beaten,” he said. “So it’s a cash flow generating sector where earnings are higher and prices are notably lower.”
Within the sector, Brady’s top pick is China Mobile, the largest mobile network operator in China.
“It has more subscribers than the US has people,” he pointed out. “There’s only an 8 times P/E and 6.5% yield but they continue to grow their earnings at 2% to 4%. It’s also extremely inexpensive so the enterprise value to EBITDA is below 2, which is less than most investment-grade companies are levered.”
Outside of financials and telecom, Brady is bullish on Home Depot, which he believes is “COVID-exposed in a positive way.”
“It’s not cheap at 23 times P/E but it’s not more expensive than the market as a whole … Typically what this company has done is some combination of returning cash to shareholders in the form of dividends and doing buybacks,” he said. “And there’s clearly great earnings momentum in the context of people investing in their homes.”
To be sure, while Brady maintains high conviction on the stock picks, he recommends investors to “maintain balance” in their portfolios.
“We’ve seen a trend of lower and lower rates and extensive stimulus which is going to be hard to maintain at this level going forward,” he said.
“You don’t always want to find stuff that’s more expensive, you want to buy stuff that’s less expensive so you want to make sure you have balance in your portfolio.”
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