David Giroux, Finding Overlooked Opportunities in the COVID-19 Market

Sven

From Giroux's article:

DG: One of our favorite sectors continues to be utilities. The equity market has yet to fully grasp just how attractive utilities are today relative to the past. The emergence of low-cost renewables is a game changer for the industry. This megatrend will likely continue for the next two decades to drive an elongated cycle for replacing coal, nuclear, and inefficient natural gas with wind, solar, and battery solutions that can drive mid- to high-single-digit rate base growth, mid-single-plus earnings per share growth with attractive dividends, only modest growth in customer bills, and a dramatic reduction in carbon emissions. Given this very attractive long-term outlook combined with this significant underperformance, we believe the long-term opportunity for utilities is compelling.

Utilities is the one sector in which higher taxes don’t negatively impact earnings, as taxes are a pass-through item from a regulatory standpoint. Utilities would also benefit from a likely extension, and potential expansion, of wind and solar tax credits for renewables.

Also discussed opportunities in fixed income.

https://troweprice.com/personal-investing/resources/insights/finding-overlooked-opportunities-in-the-covid-19-market.html?cid=PI_Investment_Pilot_CAF_NoRM_EM_NonSubscriber_202009&bid=506188743&PlacementGUID=em_PI_PI_Investment_Pilot_CAF_NoRM_EM_NonSubscriber_202009-PI_Investment_Pilot_CAF_NoRM_EM_NonSubscriber_202009_20200929

FD1000

Thanks for the articles(it's from Sep 10th).
David Giroux is one of my favorite managers ever and someone who really knows his stuff with good insight and recommendations which is rare.

hank

Thanks @Sven - For some reason I’ve always read the paper fund reports they arrive in the mail, but rarely online unless I have a specific need. Recently shifted to 100% online account info (for security reasons), so don’t get Price’s reports mailed to me anymore.. As of January, as I understand it, funds will no longer be required to mail them unless you specifically request it.

On a related note, I replaced the mining fund in my static allocation a month ago with Invesco’s infrastructure GIZAX. Hasn’t done much yet, but I know it holds some utilities. Giroux gives me reason to be optimistic. Infrastructure funds must be a tough road. Price had one for a few years but gave up on it and shut it down several years ago. (Of course, you can also buy utilities funds.)

Charles

Any thoughts on his GE bet?

rforno

Charles said:

Any thoughts on his GE bet?

As a long term turnaround play possibility, I think it's a 50-50 shot. But if anyone was to take the risk who I'd trust in being careful in speculating, it'd be him. I've also toyed with picking up some uber-long-term LEAPs options as a speculative play but I've not done so yet.

WABAC

Charles said:

Any thoughts on his GE bet?

No.

He is really negative on Treasuries:

When it is hard to envision a scenario in which an investment generates a mid-single-digit return—and when it is easy to envision a scenario in which an investment generates a double-digit loss—one should stay away from those investments. Unfortunately, that is the circumstance that investors in Treasury bonds find themselves in today.

msf

The calculation that caps Treasury returns in the mid-single digits is straightforward.

"0.6% (the current yield on the 10-year note) "
Assume one can't go negative on nominal yield.
Then price appreciation is limited to what you get when rates drop from 0.6% to 0.0%.

Take a $100 par 10 year note with 0.6% coupon.
Total cash flow = 0.6% x $100 x 10 years ($6) plus return of principal ($100).
Discount that to present value at a 0% discount rate; that's $106.

So you buy a $100 note, rates drop to 0.0%, its present value (price) rises to $106. 6% gain, max. Even that he finds "hard to envision" because "investors are likely to demand a higher return than 0.6% ... in the future."

In a sense, rates dropping to zero is the worst case, because it means that there's no way to get any safe yield going forward.

Charles

Sweet.

Sven

So beware that the bonds in the fund are consisted of lower quality, i.e. junk bonds. In the longer term the risk-reward tilts in his favor. The drawdown in March 2020 was -13.7%. The fund recovered in 6 months and keeps on moving upward.

WABAC

Sven said:

So beware that the bonds in the fund are consisted of lower quality, i.e. junk bonds. In the longer term the risk-reward tilts in his favor. The drawdown in March 2020 was -13.7%. The fund recovered in 6 months and keeps on moving upward.

And the moment he's gone I'll be bailing.

Sven

David Giroux is under 50's and there is no slowing down. In addition, T. Rowe Price tends to have deep bench behind each management team so to maintain performance when the manager moves on elsewhere.

The New Horizon fund, PRNHX, ran by Henry Ellenborgen and he left in 2019. Joshua Spencer assume the helm and the fund is just doing fine - YTD is 36.5%.

MikeW

New Horizon is still closed right?

Sven

Yes, it was closed for a while. Should have closed it at even lower asset.

hank

WABAC said:

Charles said:

Any thoughts on his GE bet?

He is really negative on Treasuries:

When it is hard to envision a scenario in which an investment generates a mid-single-digit return—and when it is easy to envision a scenario in which an investment generates a double-digit loss—one should stay away from those investments. Unfortunately, that is the circumstance that investors in Treasury bonds find themselves in today.

Ditto - Just finished reading the awesome report. That was my main take-away as well. The phrase begins with something like “Other than short duration high yield bonds ...” (which he still likes).

Well - That’s a fine one. What’s an older conservative investor supposed to buy for diversification in lieu of investment grade bonds? TMSRX? Perhaps - but 2 years does not constitute a serious test. On the surface that might well suggest putting more into equities. However, every so often there come along those nasty 30% market dips. If you’re in the distribution phase, those can seriously upset your cart. BTW - Hasn’t this “can’t win with bonds” prediction been echoing through the chambers of investment gurudom for something like the past 12-15 years now?
-

RE GE - They’re big in jet engines and suffering along with aviation in general. One chief competitor, Rolls Royce, has been plagued with serious quality issues in recent years. Most commercial aircraft can be adapted to accommodate engines from different manufacturers depending on what the airline prefers.

Mark

Well @hank, about a week ago I believe @Sven or @davfor posted an interview with Mr Giroux wherein he mentioned Utilities as a sector of interest. I bought FUTY after reading that and am up 5%+ since that time. Might be an area to explore.

hank

+1 @Mark - You mean someone can actually make money by reading this board?

(Just kidding)

Mark

There have been rumors to that effect, or maybe they were alternate facts. I don't remember and can't keep any of it straight anymore.

Roy

@Sven

And the total drawdown was greater at around 20.7% from 2/14-4/3.

sma3

@Hank I share your frustration. I am early in the "distribution phase" and take seriously the models that show major losses early in retirement are very hard to make up. I dont see much out there that has a margin of safety needed to avoid a 30% haircut. FUTY crashed with everything else in February.

The fact that the stock market has made a V shaped recovery does not mean the next leg down will snap back as quickly. Conservative dividend stocks didn't drop as much so I am putting most of my equity exposure ( still a low %) there and trying to find alternatives from the MFO commentary and staying in short term bonds.

I also think Energy will eventually have to rebound. Everyone hates this sector, but buying well capitalized companies or conservative funds will likely be smart in two or three years

Derf

Energy : Would you @sma3, be talking renewable or gas & oil ? Just wondering.
Stay Safe, Derf

Sven

@Roy,

The maximum drawdown data I posted was from MFO premium that started from Jan 1, 2020 to 8/30/2020.

sma3

@derf

This takes an hour and has no specific names, ( other than mutual fund these guys run GRHAX) but they compare the current values in energy to "death of Equities" BusinessWeek cover 1981, Gold etc..

https://thefelderreport.com/2020/10/07/leigh-goehring-on-the-generational-opportunity-in-energy-stocks-today/

XOM market cap now equal to NEE and ZOOM. Which one do yo think will be higher in a year or two (CVX probably safer bet though)

Mark

NEE. Fossil fuels are not dead but I don't expect them to provide much in the way of growth in either the near or long term. Alternative energy and the environment are laying heavy on many peoples minds and they will also gain a lot of traction if a blue wave washes ashore. However even if there is no blue wave the world is moving in that direction.