The Train Is Leaving The Station - Part II

Summary

• Out-of-favor stocks have just started to outperform.
• The bond market still has to let go of its fear, and put away lower for longer while the cyclical, and potentially secular upturn, takes hold.
• The end result is that we are just getting started with regards to the reversion-to-the-mean trade.

Introduction

The paradox of the markets today, are that parts of the market are historically overvalued, think the bond market as measured by the iShares 20+Year Treasury ETF (TLT), and think the S&P 500 Index (SP500), where I have written about the flaws inherent in the SPDR S&P 500 ETF (SPY) and the Dow Jones Industrial Average ETF (DIA) in this article titled, "Exxon Mobil Exit From Dow Reveals S&P 500 Index Structural Flaws", and parts of the market that are historically undervalued.

Looking at the chart above, we have indeed followed the classic bubble pattern in the S&P 500 Index that Jeremy Grantham outlined, just with a time lag, and a COVID-19 curveball, that caused a large drawdown before the melt-up higher.

From these extremely lofty heights and extremely high starting valuations, traditional investors who focus only on stocks, bonds, and REITs, are likely to be up against a signficant headwind over the next decade.  In fact, GMO estimates that U.S. large-cap stocks will deliver a negative 5.2% annual real return over the next seven years.

Think about that for a minute, and imagine if that scenario occurs what it would do to your future portfolio values and retirement plans.

The key to avoid this detrimental return scenario is to own assets that are historically undervalued and out-of-favor, which have the potential to deliver non-correlated returns that benefit the entire portfolio.

Believe it or not, commodities, and commodity equities, which I wrote about Goldman Sachs (GS) advocating publicly recently, are perhaps the ideal assets for this projected low return environment, given their current out-of-favor nature and still very low starting valuations, and this is playing out real time at The Contrarian in 2020.

Historically Undervalued, Out-Of-Favor Equities Outperforming In 2020

It would be easy to think that the vaunted FAANG stocks, meaning Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL), (GOOG), and their large-cap growth brethren, including Microsoft (MSFT), Salesforce.com (CRM), and Tesla (TSLA) are the only investment worth owning in 2020, however, under the surface, economically sensitive and inflationary sensitive assets are quietly outperforming since the March 23rd, 2020 broader market low.

My most talked about public call in 2020 has been this ongoing series on Antero Resources (AR) that started with this article where there was a lot of debate from both sides of the ledger.  Ultimately, the returns from that first publication date have been very strong with Antero Resources shares higher by 177.0%, outperforming the S&P 500 Index's comparative return of 9.8% over this time frame.

Far from just stock specific outperformance, there has been a broad tailwind for economically sensitive assets and inflationary sensitive assets ever since the broader markets made their low on March 23rd, 2020.

Looking at the chart above, which was current as of the afternoon of December 16th, 2020, the SPDR S&P Metals & Mining ETF (XME), led by steel equities, is higher by 130.5% since the March 23, 2020, broader equity market lows. Energy stocks, pinned near their recovery lows at the beginning of November, have surged, with the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) now higher by 90.5% since March 23, 2020. The Invesco QQQ Trust (QQQ) is higher by 81.6% over this time frame. Precious metals shares, as measured by the VanEck Vectors Gold Miners ETF (GDX), which led the recovery rally for a long duration, are now up 72.9% since the broader market lows. Large-cap energy stocks, as measured by the Energy Select Sector SPDR Fund (XLE), are up 65.5% since the March 23, 2020, inclusive of the 28.0% rally in November, where SPY was higher by 10.9%. At the bottom of the list of performance since the broader market lows, is the SPDR S&P 500 ETF, which is higher by 63.4% since March 23, 2020, which itself is a remarkable recovery, yet clearly inflationary assets, led by commodity equities, are largely outperforming since the broader market lows.

With regard to The Contrarian, this is playing out real time in 2020, with our options focused Bet The Farm Model Portfolio up 177.7% year-to-date through Dec. 11, 2020, outpacing the 15.4% return in the SPDR S&P 500 ETF over this time frame. If options are not your cup of tea, which should be true for most investors, our Best Ideas Model Portfolio is higher by 45.8% YTD through Dec. 11, 2020, again outpacing the 15.4% return of the SPDR S&P 500 ETF over this time frame. Even our Stuck On Yield Model Portfolio, which as the name implies, focuses on yield oriented stocks, is positive since its Feb. 21, 2020 launch, no small feat given that many yield-oriented stocks have been decimated by cuts in their dividends as the COVID-19 pandemic spread aggressively.

Clearly, stock picking matters here, as I showed earlier in this compare and contrast article from February of 2020, comparing Antero Midstream (AM) to Energy Transfer (ET), with AM shares up 32.6% in 2020, and ET shares down 38.4% as of this writing. Having said that, there should be a broad tailwind, and there has been a broad tailwind, for commodities, and commodity equities.

Member Compliments Keep Rolling In

Nothing warms my heart more than helping investors, and nothing hurts me more than when things do not work out, especially since I eat my own cooking to a degree that most analysts would not fathom.

Fortunately, sticking to our primary investment thesis, which as been anything but easy, has been very rewarding, and it is fulfilling to see positive outcomes, highlighted by the member compliments below.

And I want to thank you for the research, without which I wouldn't have the conviction to concentrate my portfolio. It is up more than 200% this year. Very likely I will be able to retire in the coming year. 

Member compliment received December 15th, 2020.

I have accumulated over 96K shares from MAR 10th until 2 weeks ago (in Antero Resources shares). My average price is $1.67 (the stock was trading recently around $5 per share). KCI research is the reason for this... Its about the thoroughness of research that led me to have the conviction to jump in.. I simply added his analysis coupled with understanding the ramifications of the oil price war and Covid on the Energy Sector.  I wrote this to thank KCI for his insight, research and investing service which is outstanding.

Member compliment posted here on December 8th, 2020.

Before 2020, I thought it would have been crazy to pay over $1,000 for a subscription. Yet after reading one of Travis' articles and a 2-week trial, I realized that the value offered here, vs other services, is substantially greater. I initially subscribed to The Contrarian for knowledge and if I made money, then great; I've become a better investor due to this close-knit group and the return potential has been far more extraordinary than I imagined coming into this year. The crazy thing is that things are just getting started, as financial markets are at relative extremes, rarely reached historically, according to The Contrarian's analysis. Travis is not your typical go-with-the-flow investor, hence the group name, The Contrarian. The group focuses on the most undervalued sectors of the market that have outstanding growth opportunities and while our gains have been extraordinary this year, I am still in awe of the enormous future return potential. Here, you will find many highly competent investors contributing towards a variety of topics that will leave you learning something new every day. If you are looking for an author who is competent, respectful, formally educated, and thinks outside the box, then give The Contrarian a try – I’m glad I did, and my portfolio is happy too.

Member compliment posted as part of a formal review on August 27th, 2020

Thanks for your input Travis. I must say you do have a very pragmatic and calming way of framing things and make some really good points. I don’t think I have ever come across anyone with so good hand holding skills regarding stock investments.

Member compliment posted on August 22nd, 2020.

I completely agree that Travis' style is calming, professional, poised and (positively) unique. It's Travis' style and professionalism (especially responding to rude responses in public articles) that really distinguished him (besides good research and a shared contrarian view) and attracted me to The Contrarian.

Travis enables counterpoints to be shared and, as he's done here, actually encourages it. Iron sharpens iron and an echo chamber is dangerous. Many of us have very (probably irresponsibly) high portfolio percentages allocated to our favored names so I think it's important for us to continue enabling these questions and this dialogue.

Member compliment also posted on August 22nd, 2020.

I think of you as the Wayne Gretzky of analysts. A couple things I remember you saying that have happened - PM's would lead the way higher for commodities in general, then E&P stocks would lead the way up before the underlying. We're starting to see some strength in natural gas here recently. Things are looking pretty darn good to me.

Member compliment received on August 11th, 2020, and as a sports fan for most of my life, I appreciated the context.

The investment commentary is first rate. Also, Travis has expert knowledge of the natural gas industry and specific high potential stock picks in this area. (Lots more besides.) All this builds confidence in his stock picks. Another real plus is the member chat area, which is full of really excellent ideas, observations, forecasts, etc. Am grateful to the lords of investments for allowing me to discover The Contrarian.

Member compliment was received on August 8th, 2020, and this was also posted as a formal review.

I’ve been a subscriber to KCI’s research service and all I can say is that I wish I had done so sooner. Definitely the best of the 4-5 I’ve tried so far.

Member compliment was posted on August 7th, 2020.

Having spent my career as a market research analyst, being surrounded by competent analysts, I observed what we might call the “analyst fallacy”. Indeed, I subscribed to The Contrarian despite a high price compared to other Seeking Alpha subscriptions, because it is explicitly anti-herd or orthogonal to the herd. Indeed, the more I study it, the more I find The Contrarian subscription price to be a relative bargain.

Member compliment posted in a series on July 30th, 2020.

The feedback, positive and negative, indicates that I am headed in the right direction with The Contrarian.

Closing Thoughts - Historic Opportunity Is Still Just Getting Started

All the time, I get questions about if the opportunity is now in the rear view mirror, given the type of returns generated in a short time frame, which is illustrated with my recent November 13th, bullish article on U.S. Steel (X) shares, with U.S. Steel shares higher by 74.5% since November 13th, 2020, outpacing the S&P 500 Index gains of 3.7% over this time frame.

Building on this narrative, the Bet The Farm Model Portfolio is higher right now by 177.7% YTD, and the Best Ideas Model Portfolio is higher by 45.8% YTD through Friday, December 11th, 2020, with the S&P 500 Index, as measured by the SPDR S&P 500 ETF higher by 15.4% YTD. As of August 10th, 2020, these two portfolios were higher by 102.7%, and 3.7% respective, with the SPDR S&P 500 ETF higher by 5.0% so you can see the progression.

With those type of returns, it might seem like the opportunity has passed, however, consider that these two portfolios gained 1172.8% and 126.4% in 2016, all documented in The Contrarian, and that was the "Appetizer" to what I think is the "Main Course" occurring right now in front of our eyes.

Will there be material pullbacks and moments where our thesis is tested and questioned?

Of course.

However, being able to ride out the periods of underperformance is a critical part of sticking with any investment strategy.

Wrapping up, I think there is only one generational opportunity in the investment markets today, and that opportunity is specifically in downtrodden commodity equities, which are still incredibly cheap on a historical and relative basis.

Importantly, these equities will generally benefit from higher interest rates, which I believe are finally on the horizon. Adding to the narrative, many investors operating in this space have had to run a long/short portfolio to survive the past seven years, however, the irony today, is that the most operationally leveraged companies, which are generally the short positions in these aforementioned long/short portfolios, have the most upside return potential at historical inflection points.

We are seeing that right now, and two specific public examples that I have highlighted include U.S. Steel (X), which I wrote about here, and Occidental Petroleum (OXY), which I wrote about in this public article. If those two are too high octane for you to look at as a investor, consider Wells Fargo (WFC), which has some of the same out-of-favor characteristics, as I detailed in this recent article.

In summary, investors chase performance, that is just part of human nature, and many investors are chasing performance in the hottest sectors today, including the technology sector, even though energy equities (XLE) are outperforming technology equities (XLK) over the past month and a half.  Having said that, market participants will generally not consider the out-of-favor equities today, even acknowledged industry leaders, until they have a long-run of outperformance.

I witnessed this first hand with Realty Income (O), which I have written about this year here, in late 1999 and early 2000, trying to sell this position as part of a portfolio in my role at Charles Schwab (SCHW) and Chicago Equity Analytics, yet very few investors would even consider it. This was the case, even though Realty Income shares had roughly a 10% dividend yield back then, and most investors have it as core holding today, with a dividend yield that is less than half what it was, and a narrowing growth runway after a twenty-year good run of strong performance.

I also witnessed the same thing when I was buying out-of-favor REITs, specifically General Growth Properties, and First Industrial Real Estate (FR) in late 2008 and early 2009, which I chronicled in this article that I published on February 27th, 2020.

Use Panic Selling To Your Advantage - Highlighting A 14% Yielding Model Portfolio - KCI Research Ltd.

The key to build real wealth, IMO, is to own concentrated positions, ideally buying into panic selling, in the best outperforming companies of the next 20 years, not the best performing positions of the past twenty years.

For help in that endeavor, consider a membership to one of my research services. On that note, I am continuing to offer a 20% discount to membership (I am extending this through December and then pricing will return to the normal levels) to "The Contrarian" (past members can also direct message me for a special rate). Remember, this compliment when it comes to pricing.

Indeed, I subscribed to The Contrarian despite a high price compared to other Seeking Alpha subscriptions, because it is explicitly anti-herd or orthogonal to the herd. Indeed, the more I study it, the more I find The Contrarian subscription price to be a relative bargain.

And this one on pricing too.

Before 2020, I thought it would have been crazy to pay over $1,000 for a subscription. Yet after reading one of Travis' articles and a 2-week trial, I realized that the value offered here, vs other services, is substantially greater.

Additionally, I am once again offering a limited time 30% discount for the first 10 new members (I expect these slots, some of which I view as a stepping stone to "The Contrarian", to fill up fast as they have done previously) to a host of research options, including a lower price point. If you subscribe to a premium option, I will set-aside time for a personal phone call to get up to speed. To get these offers, go here, and enter coupon code "december" without the quotes.

Reach out with any questions via direct message.

Via my research services, or another avenue, please do your due diligence, and take advantage of what I believe is a historic inflection point, which I believe will supersede 2000-2002, and 2000-2007, in the growth-to-value rotation.

Best of luck to all,

Travis

P.S. Resilience is perhaps the most important ingredient to be successful in life, and in the markets. Keep that in mind right now.