Likes/Dislikes – April 16th, 2021

Below are Evergreen Gavekal’s Likes/Dislikes for April 16, 2021.

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OUR CURRENT LIKES AND DISLIKES

Changes highlighted in bold.

As an overarching recommendation, present market conditions have become so hyper-bullish that this author is suggesting significant profit-taking; related to this, new buys should be limited to those securities that offer a compelling risk/reward proposition. Gold miners are an example of the latter after their correction since this summer’s spectacular run-up, despite their recent mini-rally (this week, that rally has become less “mini”).

As an update to this cautionary view, what I have long called COPS—Crazy Over-Priced Stocks—are under intense downward pressure in most cases. Underscoring this development, the formerly white-hot ARKK funds, with heavy exposure to many of the extremely pricey “story” stocks such as Tesla are down roughly 20% since mid-February, notwithstanding a small bounce over the last month.

LIKE

Large-cap growth.  (For the most part, there continues to a better risk/reward ratio with growth-at-a-reasonable-price—GARP—type issues; as with the overall US stock market, bargains are increasingly scarce.)
Certain international developed markets, especially Japan (The Japanese market has been extremely strong lately; thus, prudence on new buys is appropriate. Longer-term, though, the Nikkei has a tight linkage to global economic vitality and it has had a multi-year breakout, a highly positive development.)
Publicly-traded pipeline partnerships, i.e., MLPs and other mid-stream energy securities. (MLPs have had a strong start to the year, now up 26% including distributions, drastically outperforming the S&P 500; their up-move over the past few weeks has erased nearly all of the mild correction they experienced in March.)
Gold-mining stocks (The gold miners were hit hard earlier this year after a stellar 2020; this weakness caused us to urge re-accumulation and since early March they’ve had a punchy 20% recovery to scant fanfare, rewarding those who took our advice to increase exposure during their correction. We believe there is considerably more future upside for these issues.)
Gold (It too has also been acting better recently. Any attempt by the Fed to employ “yield curve control”, such as by forcing down longer-term interest rates, could ignite the precious metals complex once again.)
Silver (It has had a wild ride in recent months due to the “Reddit Rebels” but it is now down 3% for the year. Should US inflation accelerate, however, silver has considerable long-term upside potential; additionally, around 10% of silver demand is from solar panel fabrication.)
Select international blue chip oil stocks (Based on the enormity of the rally since early November, some reduction of energy exposure might be prudent; recently, even a number of the energy laggards have been trending up. We continue to believe oil prices will trend higher, possibly much higher, over the course of the year.)
Short-term investment grade corporate bonds (1-4 year maturities; favor shorter maturities due to rising inflation risks because of the likelihood that the Fed and the Treasury are over-stimulating the US economy.)
Emerging market (EM) bonds in local currency (focusing on stronger countries)
Large-cap value (Value stocks, such as energy and financial issues, have been the biggest winners from the vaccine news; accordingly, buy somewhat more cautiously—and possibly do some trimming—even though this style is likely to be among the main beneficiaries of the reflation/reopening trends in 2021.)
High-dividend equities with safe distributions (Despite the sharp recent rise in treasury yields, investors still have a desperate need for cash flow and many equities provide much higher yields than bonds; as a result of the recent jump in treasury yields, some high-dividend payers have pulled back to more attractive levels.)
Most cyclical resource-based stocks (These have also experienced powerful up-moves; thus, some profit-taking is appropriate.)
BB-rated corporate bonds (Buy more selectively after a spectacular rally and favor shorter maturities.)
Canadian REITs (Avoid office issues for now.)
South Korean Equities (This is another area in which to be less aggressive given how much this market has risen since late March; as we noted in early December, the South Korean index broke out to a new all-time high and since then has sprinted another 15%.)
Small-cap value (Based on the vaccine-driven rally since late October, a buying pause is prudent; small cap issues are typically hit the hardest during corrections.)
Uranium and uranium producers (The world’s leading uranium miner is up roughly 70% since early November, validating our positive stance on this sub-sector; thus, additional profit-taking is prudent. Evergreen closed out its position in the planet’s biggest U2 miner recently.)
Certain “Virus Victim” equities such as refiners, homebuilders, and select retail stocks (After a powerful rally in homebuilders and certain retailers, be more selective; subsequent to breaking support and falling initially post that break, refiners have roared back on the vaccine news.  Look to buy refiners during a pull-back as they should be beneficiaries of the economy re-opening.)
Investment-grade floating rate corporate bonds (Despite a vigorous rally in recent months, there remains decent long-term value in this bond market niche.)
The higher quality mortgage REITs (These have risen materially from our initial recommendation; recently, they have continued to rise so some profit-taking is reasonable.)

NEUTRAL

A wide range of high-income securities, including preferred stocks (Preferred stocks look less attractive with prices up, yields down, and inflation risks on the rise.)
Copper producers.  (Moving to neutral due to the huge rally by this group; profit-taking is advisable.)
Renewable Yield Cos (These Green Energy, MLP-like securities have retreated, in some cases considerably; thus, resume buying in certain names.)
Intermediate-term investment-grade corporate bonds, yielding approximately 2.5% (Now rated neutral due to our increasing inflation concerns and the paucity of attractive yields.)
Mid-cap value
Emerging stock markets; however, a number of Asian developing markets look undervalued (Caveat investor: These are much less bargain-rich than they were six months ago).
US-based Real Estate Investment Trusts (REITs) (It is critical to be highly selective with this sector; fundamentals for many REITs are likely to be very challenged.)
Cash
Canadian dollar-denominated short-term bonds  (Thanks to a rebound in the Canadian dollar, these have provided solid returns in recent months; some profit realization may be prudent.)
Intermediate-term Treasury bonds
One- to two-year Treasury notes
Traditionally “safe” sectors such as Staples and Utilities (However, some utilities have corrected hard and appear attractive; the rally since March 1^s^t in the utility sector has diminished our enthusiasm for it.)
Virus Victors (I.E, those companies that have benefitted from global lockdowns and now sport premium valuations.)
Floating rate bank loans (We upgraded these to neutral due to the prospects of a strong economy later this year, lowering default risks.  Also, their floating rate nature is a solid inflation hedge.)

DISLIKE

Small-cap growth (After a recent 8% pop, this style is now up 23% for the year and continues to look extremely pricey.)
Long-term Treasury bonds (These are in the dislike category due to both Evergreen’s and Gavekal’s rising conviction in a looming burst of inflation; recently, long treasuries have been thumped, justifying our prior concerns.)
Long-term investment grade corporate bonds (These are viewed negatively because of the narrow yield gap, or spread, between corporate debt and treasuries combined with our escalating inflation fears.  However, there are a smattering of long-term issues that still offer attractive yields. Long-term corporate bonds are now down 8.7% on the year.)
European banks (Moving to dislike status due to a second round—or is it the third round?—of lock-downs in many key eurozone countries; additionally, negative interest rates in Europe are very hard on bank profitability. The steeper yield curve—longer rates rising much faster than shorter rates–occurring around the world is a major positive, however.)
Most municipal bonds (Munis have been hit fairly hard lately, validating our previous caution.)
US dollar (The dollar has bounced a bit lately. However, its long-term outlook appears very challenging and it remains overvalued versus many currencies, especially those in Asia.)
Many semi-conductor tech stocks (We do have a number of semi holdings for Evergreen client; however, these were typically acquired far lower than where they trade today and this space appears generally over-valued with a few exceptions. This pricey group has been sliding recently.)
Mid-cap growth
Lower-rated junk bonds
Green energy stocks (Note, this refers to equities not the Renewable Yield Cos; most of the former have truly gone ballistic. Many green energy plays have been slammed in recent weeks.)
SPACs (Special Purpose Acquisition Companies, which are structured to greatly favor insiders and disadvantage retail investors. A growing number of SPACs are struggling in the market lately; perhaps, this bubble is bursting.)
Most new issues (The IPO market is as frothy as I’ve seen it other than the giddiest days of the dot.com era.)
Despite a disastrous February, most of the popular Reddit/WallStreetBets stocks still have material downside, though they could rally, briefly, after such a pronounced decline. (A few have surged again lately, leaving them exceptionally vulnerable to another meltdown. Interestingly, the latest blast of stimulus checks hasn’t done much to lift this highly speculative space.)

DISCLOSURE: This material has been prepared or is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Any opinions, recommendations, and assumptions included in this presentation are based upon current market conditions, reflect our judgment as of the date of this presentation, and are subject to change. Past performance is no guarantee of future results. All investments involve risk including the loss of principal. All material presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed and Evergreen makes no representation as to its accuracy or completeness. Securities highlighted or discussed in this communication are mentioned for illustrative purposes only and are not a recommendation for these securities. Evergreen actively manages client portfolios and securities discussed in this communication may or may not be held in such portfolios at any given time.