It’s been a difficult year. Inflation remains a challenge, with the Federal Reserve signaling yet another potential shift in its efforts to tame it. St. Louis Fed President James Bullard said Thursday morning that aggressive central bank interest rate hikes have so far had “only limited effects” on rising prices. Just last week, the market soared on hopes the Fed would instead slow the pace of rate hikes. About a year ago, when inflation fears first started to percolate, we said to own stocks that make things, do stuff at a profit and return some of that extra cash to shareholders in the form of dividends and buybacks. Jim Cramer said during Thursday’s “Monthly Meeting” for November that while it was a good call, it was not a great one because he left out one key detail: Stocks should not be expensive on any traditional metric. First, let’s look at three tough lessons we learned and how we managed through the turmoil. Second, we’ll discuss three investments that were right for this market and challenged macroeconomic backdrop. What we learned 1. We underestimated external factors. The Fed’s commitment to rein in stubbornly high inflation meant raising rates aggressively to slow the economy. In addition, the strong dollar proved to be a burden to multinationals doing business outside the U.S. If inflation doesn’t cool enough, the Fed will likely remain hawkish, and if Bullard is right rates could end up much higher. This dynamic has been particularly difficult for high-growth tech stocks that suffer in a higher-rate environment, including Amazon (AMZN), Meta Platforms (META), Alphabet (GOOGL) and Microsoft (MSFT), which all have had a bad year. Even Salesforce (CRM) was hurt by these tough external pressures, despite committed business from its enterprise customers. 2. We thought companies could grow in a slower economy. We thought our high-quality holdings could maintain their growth rates and their stock prices would follow. But doing so amid a sluggish global economy proved impossible. This left many companies with excess inventory, as supply outran demand. Our semiconductor holdings Advanced Micro Devices (AMD) and Nvidia (NVDA) took a beating. We sold some of each stock when they rose in April, but bought some back when we thought the worst was behind us. Companies with exposure to advertising, including Amazon, Meta and Alphabet were also weighed down by enterprise customers and small businesses tightening their budgets. 3. We were led astray by management: Both Disney (DIS) and Meta reported disappointing third-quarter earnings results, revealing mistakes by their CEOs. Disney’s streaming losses are piling up and Disney+ may not be profitable until some point in fiscal year 2024, putting pressure on its balance sheet. While Disney is a great franchise, we are not pleased with how management has handled the business recently. At the same time, there’s still hope for a turnaround, so we’ll be looking out for potential progress in Disney’s upcoming earnings reports. Jim has also called for Disney to fire CEO Bob Chapek. Meanwhile, Meta’s Mark Zuckerberg is focused on building out the metaverse and is willing to take losses along the way. This lack of discipline in a struggling ad market was unexpected. We’re not too keen on a company funneling cash into a project that won’t realize a profit for years to come. The company has made the difficult, but necessary, decision to lay off staff and reorganize its divisions to better manage expenses. At the same time, user engagement in the company’s core business is intact. What we got right 1. We waited out China. We made a bet on China not sticking with its so-called zero-Covid policy and we’re starting to slowly see it pay off. When China last week reduced quarantine time for international travelers, Club holdings Estee Lauder (EL), Wynn Resorts (WYNN) and Starbucks (SBUX) got a boost. We are waiting for China to fully reopen and believe these three names will be great plays to capture growth in the region. 2. We made the right recession plays : Off-price retail operator TJX Companies (TJX) had a great fiscal third quarter this week, benefitting from an industry-wide inventory glut. At the same time, we see Constellation Brands (STZ) as a recession-resistant stock because beer tends to be consumed regardless of the economic climate. While STZ is expensive, its product line-up is in high demand and the company has reported strong earnings results. 3. We stuck with our oil stocks . We have a lot of exposure to oil and natural gas, and it’s been working for us. Our energy holdings have been a great diversifier for the Charitable Trust, which is the portfolio we use for the Club, as they’ve served as a hedge against inflation. We’ve also benefitted from their significant cash flow generation, much of which has been returned to shareholders through dividend payouts and stock buybacks. We own Pioneer Natural Resources (PXD), Coterra Energy (CRTA), Devon Energy (DVN) and Halliburton (HAL). And there could be further upside given the group’s capital allocation discipline. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Oil wells pumping outside of Midland Texas.
Joe Sohm | Visions of America | Universal Images Group | Getty Images
It’s been a difficult year. Inflation remains a challenge, with the Federal Reserve signaling yet another potential shift in its efforts to tame it. St. Louis Fed President James Bullard said Thursday morning that aggressive central bank interest rate hikes have so far had “only limited effects” on rising prices. Just last week, the market soared on hopes the Fed would instead slow the pace of rate hikes.
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