March Madness: Final Four Investing Bracket 2023
Summary
- The first and original spin on stock market investing meshed with the thrill of the NCAA March Madness tournament!
- Which "team" (Asset Class) wins out the rest of 2023?
- Will active or passive be the answer?
Kameleon007/iStock via Getty Images
March Madness is back!
Not only is this “exercise” a way for us to share our ideas from a macro perspective, but it offers a fun platform to dig into a couple specific investments and themes we are following or excited about in the year ahead.
We’re proud to say that My Portfolio Guide, LLC was the first investment firm to publish a March Madness investing bracket where we share our picks and match them up against each other. We break down and assign each of the four “regions” with an asset class and then pick teams (stocks) that we think have the best chance at doing well relative to others.
In the early rounds of our bracket we have a few very familiar names faceoff with some tech bellwethers meeting such as #5 Qualcomm (QCOM) vs #11 International Business Machines (IBM). These are two companies still doing a bit more than hanging on to their glory days. IBM has been a leader in computer and IT innovations since 1945 and fought through some hard times. As stodgy a company as you think it might be, enjoy the 5.15% dividend while this $114 billion behemoth sinks its teeth into the exciting new world of AI. You likely have heard of “Watson”, IBM’s question and answer computer system, but that’s only the start of what they’ve been doing since developing this technology.
What you’ll find as part of this exercise and bracket we produce, is really a way of explaining some current market themes and ideas we like as well as some we think are either done or fizzling out. Specific to the left side of the bracket (namely the Large Cap and Small/Mid Cap asset classes) you’ll see we like Energy, Cyber Security, and a newcomer into the Big Dance… Artificial Intelligence.
IBM loses to QCOM based on valuation. QCOM has far more upside this year trading at about half the overall value of the S&P 500 (roughly 11 times earnings to 21 times earnings of the market) and also gives us a little dividend of 2.52% that you don’t often see in tech companies. QCOM does not come without it’s challenges but if you want to invest in a tech company long-term and don’t want to lose sleep every night, this could be a core position to own. It trades today around $120/share but we see this being a $150 stock again with about a 25% gain from these levels over the 12-18 months (barring some unexpected disaster or broad market meltdown).
Speaking of the broad market, we then illustrate our opinion that dividend yielding and quality will win out this year over what has worked the past decade (mega cap tech). A perfect ETF (exchange traded fund) to accomplish this is the #9 seeded First Trust Rising Dividend Achievers ETF (RDVY). This bucket of 50 stocks screens for ones that have a rising dividend greater than the preceding 12 months, three year and five year periods. To make the list each company in this ETF must exhibit positive earnings per share greater than the previous three fiscal years, have a cash to debt ratio greater than 50%, and a trailing 12-month period ratio no greater than 65%. Long story short what you get is, in our opinion, exactly what you want to lean on during more volatile times. It’s top sector weighting is currently 30.14% in Financials which will be another smart place to be later on in 2023.
By the way, speaking of financials, and specifically bank stocks….this news is hot off the press with Silicon Valley Bank collapsing this past week. Obviously this rattled a lot of nerves and the way we see it is that it won’t be a 2008 “Lehman” type event, however there will be other casualties or at least some banks that get major pressure. Watch for those that have even worse financials and balance sheets than SVB did. Trading on First Republic Bank (FRC) was halted on Friday and that’s clearly a serious cautionary sign of what could happen to them and other smaller, regional names. Don’t panic with the more established ones as they’ve had to say ‘no’ to risk in this environment while some others opted not to and are going to possibly now face the music. Lastly, “wherever there is a buyer there is a seller” and once the dust settles, the banking sector is going to have some absolute gems available for sale. Get your shopping list ready…
While RDVY beats the S&P 500 this year and could easily win this “region” (asset class) of the bracket, we have it running into a dark horse and newcomer in the Energy sector, #4 seeded EQT Corporation (EQT). You could watch CNBC all day long and likely never hear of this $12 billion company out of Pittsburgh, PA. They’ve been around since 1878 and are the largest natural gas producer in the United States with a focus on the Marcellus and Utica shale plays. Natural gas prices will likely fall a fair amount from here in 2023 because of supply outpacing demand after last year. That being said, this is very much worthy of a long-term investment. While EQT won’t triple overnight you can expect this $32 stock to hit $37 sometime over the next year for at least a 15% gain. Additionally, as it relates to natural gas in general, watch the commodity drop in price but the quality stocks associated with them not as much (which is the key to what we’re trying to position here longer-term).
Switching back to our AI theme and some old familiar names…we have #6 Microsoft (MSFT) going against #12 Adobe Inc. (ADBE) yet each eventually falling to good old #2 seed Apple (AAPL). Say what you will about Apple but they’re still as solid as it gets. Even #8 Tesla (TSLA) gets a nod with it being more than a car maker or even a tech company; they too are in the AI space with the world’s largest pool of driving data and that combined with AI modeling power will position them for further advancements such as being a leader in autonomous driving.
Microsoft brings us one of the hottest AI buzz and developments in the world today with an investment in OpenAI, the company that developed ChatGPT. They originally started with a $1 billion investment but are extending the partnership into a multiyear and multibillion-dollar commitment. MSFT’s search engine Bing just reached 100 million daily active users after its ChatGPT adoption. If you haven’t heard of ChatGPT (GPT stands for generative pre-trained transformer), it is an AI language model that’s amazingly adept at answering questions and carrying conversations. Unlike a Google search, which gives pages of links that you have to wade through and synthesize, ChatGPT synthesizes the results for you. Compared to Wikipedia, ChatGPT is more concise and digestible. It was launched only this past November and is absolutely fascinating; we’d love to cover it more here but that’s for a later date.
Back to some old school names that you do know about…we snuck in #10 Ford Motor Company (F) and another “boring” company with #3 ConocoPhillips (COP) to reiterate our premise that while some of this exciting tech and innovation by way of AI is growing rapidly, it’s also early in the game and there will be casualties (think solar stocks a few years ago; a great/viable trend but way too many players of which many got clobbered). Sticking back to the balancing theme of quality businesses, great valuations, meshed with the reward of a dividend, you get Ford yielding 4.62% and Conoco only at 2.16% but trading for a bargain P/E of 7.
Conoco eventually wins it all but don’t let yourself be soured on ignoring the company that by all means could beat them; scorching hot #1 seed C3.ai Inc. (AI). We actually could easily make the case to have this company win it all this year as it fits with our AI excitement/curiosity but with that also comes a heavy dose of the unknown. Simply put…this roller coaster is too much for most stomachs out there but if you have the ability to not fixate on volatility, here is your stock of the year. C3 AI provides SaaS (software as a service) applications for AI and has an intriguing partnership with Alphabet. All of their applications are available on Google Cloud and while the future could be insanely bright, the reason to be modest in buying this early is it has a penchant to attract, speculative, momentum, and “meme” money.
Small and Mid Cap
Last year it was the tiny Saint Peter’s University Peacocks out of Jersey City, New Jersey that made history as the only 15th seed to make the Elite Eight in the NCAA tournament. Who is going to be this year’s “Cinderella” team? Every year a smaller “mid major” college seems to make a run or upset a more established powerhouse. What’s more with our narrative this year is that unlike in basketball, the odds of a small company outperforming a larger one in the stock market, is actually higher this year and happens frequently. While more volatile, Small and Mid Caps tend to bounce back the fastest after a bear market and although the year is young, that’s been exactly the case so far in 2023. Thus far the Russell 2000 Index has been pulling away a bit and outperforming the S&P 500 for not only 2023 but the better part of the last 12 months.
We’re going to start backwards and share who wins the entire Small/Mid Cap region. The pick we’re going to introduce to you plays into us thinking the world is on the brink of some troubling and potentially unknown threats. We have #7 First Trust NASDAQ Cybersecurity ETF (CIBR) winning and making it all the way to the Final Four. Unless you’re in the cybersecurity industry, taking a peek under the hood of this ETF will produce a list of companies that you’ve likely never heard of. This industry parlays with the growth of AI as well but the main trend to be aware of is the growth of cyber-crime is predicted to hit $8 trillion in 2023 and grow to $10.5 trillion by just 2025!
CIBR knocks out our #4 seed Mid Cap ETF (SPMD) as well as a possible overall winner in the ever steady #1 seed homebuilding stock, Taylor Morrison Home Corporation (TMHC). Taylor Morrison is already up about 21% YTD; we see this company and homebuilders in general cooling off, but not crashing, in 2023.
One stock that winds its way to the Elite Eight and follows our Energy theme is #6 seeded SM Energy Company (SM). This energy company is based in Denver, CO but engages in exploration, acquisition, development, and production of oil, gas, and natural gas in Texas. This company, along with several others in the same space, has been pounded recently but we think it’s getting overdone. Along with trading under four times earnings (cheap!!), it’s sporting net profit margins of 33.11%, cash flow margins of 51.08%, and return on equity of 43.19%. We’d argue you be hard pressed to find better fundamentals anywhere else.
Two lesser known Biotechnology stocks don’t get the chance to face off or really make any noise as they get knocked off early. It’s not that we think neither could find a cure for a deadly disease and rocket to all-time highs…but in the case of both #12 Arvinas, Inc. (ARVN) and #2 Rocket Pharmaceuticals, Inc. (RCKT)… (previous pun intended!), neither have something we illustrate as being important in the next market cycle. What is that you ask? Earnings… This year we’re hammering the theme of not just the sectors we like but if the rest of the world is arguing what type of recessionary landing we’re going to have (hard, soft, or no landing ; which just means delayed landing), our take on that is to again focus on quality companies who actually make money.
Later on this article you’ll see how and why we beat up on the futility of investing in most actively managed mutual funds, but in this section (and part of our bracket), we bring up one that holds its own. #3 seeded Hodges Small Cap Fund (HDPSX) is the epitome of a quality outfit that kicks the tires and vets companies the old fashioned way. We love their process and while they may not always beat the market they sure as heck are this year. Incidentally, once in a while it’s fun to peak under the hood and find a couple companies a strong fund owns and see that they too like what you are barking about; in this case they have a 6% position in SM and almost 3% in TMHC.
In our bracket we have the Hodges Small Cap Fund narrating the story that 2023 is most likely one of the more rare “it’s a stock picker’s market” environments and therefore it beats out two more companies to advance to the Sweet Sixteen round. Down goes #10 Tellurian (TELL) which is a very small but promising natural gas company out of Houston, TX and #8 Qualys, Inc. (QLYS) another cybersecurity gem based in Foster City, CA. Pull up a five year chart on them compared to the rest of the market and you’ll see a picture of growth. This is a very promising company and although it flies below most radars, is a bit frothy in valuation, it beats its peers in almost every other profit metric there is.
Lastly, since we opened this “bracketology” talk with a theme around Large Cap AI companies, how about some smaller names that have considerable promise? #11 Mitek Systems (MITK) is tiny at just over $400 million in market cap but after getting hammered last year, this San Diego company selling mobile image capture and digital identity verification solutions, is growing rapidly. Part of their woes from late last year where due to a change in their financial auditor; that can be a warning sign or in some cases an opportunity for a whole new determination and chapter of their bright future.
Our final AI company in the small cap arena is #9 seed Magic Software Enterprises Ltd. (MGIC) out of Israel. Sit down because here’s a growing AI stock with great fundamentals, one that actually makes money, and comes with a strong dividend (rare in this space)! Imagine that? This is such a hidden gem, so if you’re looking for a company with the potential to be a “double bagger”, it would not be shocking to see this $14 stock trading near $30 one day. Without much help from the market it could realistically get to $20 for a 42% gain this year.
International
#5 seeded Japan (EWJ) doesn’t get out of the gates due to losing to Mexico (EWW), but we think it’s very much worth a look within the international portion of your portfolio. For one, Japan does not always “act” like our domestic markets nor other international economies so in that regard it provides a layer of diversification most portfolios rarely have. Additionally, if you’re concerned about domestic valuations being too high, Japan is attractive trading at 12 times on a forward earnings basis with a price to book at 1.1 times and return on equity (ROE) of 9%.
We’re not being cute nor trying to predict any real time battle in the future but let’s address #8 China (GXC) squaring off against #3 Taiwan (EWT). It first has to fend off #10 Turkey (TUR) whose economy is already vulnerable but also having to recover from a pair of massive 7.8 and 7.5 earthquakes. With regard to China, let us first say that we (My Portfolio Guide, LLC) has a policy to never buy Chinese stocks directly. People may forget they’re a Communist country and with that comes the difficulty in trusting any numbers or information in general that comes out of there. Put another way, they don’t abide by the same ethics, standards, or even GAAP (Generally Accepted Accounting Principles) that we do.
As an economy, however, China will soar this year. We have them eventually losing in the final game… but in all reality there are analysts that think some Chinese stocks could literally run up 90% from here. They’ve already rallied 50% from the October lows but are still down -50% from their February 2021 peak. Why will this massive recovery likely happen? China is not only too huge to ignore but they are finally reversing policies that had crushed their markets over the past few years. If you’ve never seen the investing version of the Periodic Table of Elements, click here to see the interactive version of how so many times the country that performed towards the bottom of the heap was the winner or near the top the following year or two. Bottom line, along with being one of the cheapest valuations amongst the MSCI World Index, China’s exit from a zero-Covid policy sets the table for a remarkable recovery that not enough investors are aware of or talking about.
You can get ample China exposure by buying #11 SPDR Emerging Markets ETF (SPEM) which we are starting to fall in love with again. China, India, and Taiwan make up 29%, 18% and 16% of the ETF’s weightings as of today (to see all of them as well as more facts about this ETF, please click here).
In the earlier rounds we also have SPEM cruising through some formidable opponents such as #5 iShares MSCI EAFE Growth ETF (EFG) and an actively managed mutual fund in #11 MainStay Epoch Capital Growth Fund (MECFX). If you haven’t heard us rant about why we typically don’t like mutual funds, this is a case in point. MECFX is “5 star rated” and historically one of the better funds in the World Large Cap Growth class, but if you pull up a simple comparison to the unmanaged index EFG, you’ll see all you need to know. As time goes on this fund (like about 82% of all actively managed mutual funds) loses to the index. Specifically as of this writing the fund is down -12.41% versus the (again) unmanaged index at +8.41% over five years.
As hot as #4 Denmark (EDEN), #2 Argentina (ARGT), and #1 Greece (GREK) all were…they fall to the deep value that Emerging Markets present us this year. Argentina and Greece are up a whopping ~28% over the past year but will inevitably come back down to earth. Ironically enough the Danish economy almost mirrors our domestic performance the longer time goes on. Could there be some correlations to high tax levels and relatively large government expenditures?
Bonds and Alternatives
They say “defense wins championships” and while this often is true in so many sports, it’s the adage that too many financial advisors wished they could do, but it’s simply easier said than done. Because of the fact that NOBODY can consistently time markets, you need something in our portfolio that “zigs while the market zags” and vice versa.
In the “Alternatives” bracket we have the top three seeds all coming in blazing hot. You’ve heard of them and some will smile knowing that they avoided this train wreck (or miraculously cashed out at higher levels) while others will vomit knowing that they bought into hype and garbage. What are we trashing so hard without the slightest hint of being shy about it? Crypto…
#1 seed Dogecoin (DOGE) literally started out as a joke and then had a meteoric rise; it’s all we heard about (until we didn’t anymore…). In other words, all those who pounded the table on how it was the next huge thing and the number one crypto to buy, have suddenly gone dormant. In similar fashion we have been consistent in our skepticism of Bitcoin (BTC-USD), which comes in at the #2 seed. It’s known as “digital gold” and its counterpart , #3 seeded Ethereum (ETC-USD), is the “digital silver”. Sorry folks, for now that’s complete rubbish and we believe in owning the real alternative, in #4 seeded Gold (GLD). More on gold later…
We won’t get into what exactly these crypto currencies are because we’ve covered this before. Also, we’ve yet to meet a single human who has made actual money from any of them. Is there some future in blockchain technology? Sure…but right now avoid buying something you have zero idea what it actually is. Bottom line… all three crypto currencies in our bracket get knocked off and essentially are not worth investing a single penny in for 2023.
Let’s quickly review a few alternatives that are early casualties in our bracket and one that still has room to run (commodities). #6 seeded First Trust Global Tactical Commodity Strategy Fund (FTGC) gives you exposure to things like soybeans, wheat, cattle, corn, sugar, cocoa etc. without requiring the niche expertise needed to trade them intelligently. By the way, you’re not really worried about inflation if your portfolio has zero to little exposure in commodities… so go get some!
Although the carnage of the Bond market last year in #12 SPDR Portfolio Aggregate Bond ETF (SPAB) looks to be settling down, we still think other assets are more attractive. The small exception there might be in that of short-term tax-free municipal bonds as well as #11 seeded iShares U.S. Treasury Bond ETF (GOVT). In 2021 you could buy a one year treasury for a whopping 0.10% and now you can get them at 5.25% (not to mention the being exempt from state and local tax part of it!). The risk free nature of this investment makes it a great choice over real estate and #5 seeded iShares Core U.S. REIT ETF (USRT).
Let’s wrap up by discussing a Final Four candidate that wins out the Bonds & Alternative region…
We’ve written many times before that while previously never accused of being “gold bugs”, over the past couple of years we’ve strategically built a position in the asset for a reason. We’ve historically actually been bearish of the shiny metal as it’s simply a non-yielding asset. Regurgitating some old verbiage is appropriate in this case… “Gold is traditionally a great hedge for inflation”, right? WRONG! This is a classic misnomer that experts yap about and we then cringe hearing the general investing public repeat it as investment scripture. Just because someone says something over and over doesn’t make it true!
For your knowledge there are several stretches of market history that counter traditional wisdom: From 1974 to 1980 gold increased +353% while inflation went up +67%. From 1980 to 2001 gold decreased -67% while inflation rose +126%. We’re just giving you a couple quick reference points but at best there is a weak connection if any at all between gold and inflation so tune out anyone who spouts this nonsense.
All that said, there have been several reasons to begin owning it. We’ve advised a minimum of 5% in all portfolios with closer to 10% and even 25% in one portfolio allocation we manage.
Final Four Summary
What a diverse group that faces off in the Final Four… An oldie, a goldie, a force to be careful but not ignore, and a related threat that will impact us all at some point.
This market has plenty more calendar to deal with for the remainder of 2023 but a ton of worries to go with it. Expect a bumpy ride but if our picks (especially the Final Four) paint a story, it’s this:
Own solid, dividend yielding, and quality companies that produce a good or service that there is demand for no matter what. (COP)…is your winner this year.
Understand the world has a major economy (2nd largest although still called “emerging”) which we may not like what they do, but they have to be watched closely and are a major value relative to many other asset classes. (GXC) China …is your runner-up and finalist.
If the market tanks and the sky starts to fall again, own something unrelated to stocks or bonds and that’s (GLD).
Lastly, the dark horse chock full of companies you’ve never heard of (but will soon) as we enter a world that gets more complex and scarier by the day. (CIBR) rounds out your Final Four.
The fun part of producing this article each year is that it allows us to share some of our thoughts, strategies, and the investment themes we believe will likely play out in the months ahead. It’s all done with the caveat that we may only own a handful of the 48 investments listed in our bracket. Truth be told…most experts who pick stocks are no more successful than you would be doing the same job! The real winners are the ones who are able to pick enough stocks in the right areas and maintain the proper asset allocation relative to their investment goals.
Obviously every tournament (in the case of March Madness) only has one final winner. With this exercise, however, we are able to build an intelligent portfolio that will have a number of “winners” along with some stinkers. As an investor you actually have the opportunity every year to own multiple “teams” in different “regions” (asset classes).
Long story short, don’t fixate on the one stock that wins it all; take a look at the whole picture.
How would this March Madness Investing Bracket perform if we actually allocated money towards each pick? We’ll track the performance of our picks by assigning a dollar amount to each of the 48 picks.
Just making the Big Dance is worth something so all 48 picks are assigned at least a $25,000 investment even if they don’t make it out of the first round. From there each pick “costs” more and is weighted accordingly by either how it beats other picks or how highly it was initially seeded.
Here’s how we’re allocating each pick/round:
First round $25,000: IBM, SPLG, ADBE, TSLA, MITK, MGIC, ARVN, QLYS, MECFX, EWJ, PEIFX, TUR, USRT, PCY, SPAB, SPIB
Second round $50,000: QCOM, RDVY, MSFT, F, SPSM, SPMD, RCKT, TELL, GREK, EDEN, SPEM, EWT, DOGE, UUP, BTC, ETC
Third round $75,000: EQT, AAPL, TMHC, SM, HDPSX, EFG, ARGT, GOVT, SLV
Fourth round $100,000: AI, SM, EWW, FTGC
Fifth round $125,000: (Final Four) GLD, CIBR
Sixth round $175,000: (Finalist) GXC
Seventh round $300,000: (Champion) COP
If one were to invest per the dollar breakdowns above it would amount in total to a $3,000,000 portfolio. If that gives you sticker shock just scale back the numbers according the portfolio size you’re managing. While these picks and amounts are in no way actual investment advice (there’s our legalese and proper disclosure!)…feel free to check in with us periodically on how this portfolio mix is performing.
Enjoy the tournament and check in with us next year to see if your portfolio beats this one!
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of SPLG, SPMD, AAPLE, SPSM, COP, GLD, EQT, QCOM, EWJ, FTGC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.