For Institutional Use Only. Not for Public Distribution.
by David McGarel, CFA, CPA, Chief Investment Officer, First Trust Portfolios
Market Update - First Trust Portfolios Webcast notes - April 21, 2020
· S&P 500 is down 12 percent YTD
· S&P 500 started the year up 5% as at February 19th to start the year and just 22 trading days later on March 23, the S&P was down 30%
· Since March 23rd, the S&P 500 is up 26% since March lows
Investment opportunities
· Quality stocks especially when measured by low leverage, fortress balance sheets, growth companies and large size can still earn great rates of return even after this rally, add on the pullbacks
· Technology, Healthcare, Growth and Megacap have dominated the recovery
· What’s been left behind…. Everything else in the equity markets
More difficult ideas, huge opportunities and big returns available
Investment idea #1: Large Cap Quality Value stocks
· Large cap growth stocks are down ~5% YTD, Large cap value stocks are down -19% YTD.
· The growth oriented Nasdaq Composite is positive YTD, S&P 500 Large value stocks are down 19%
· Example of great quality value stocks include Pfizer, CVS, AT&T, Merck
· Honeywell - 10 billion in cash. The stock is down 22% YTD. Honeywell does not require additional assistance or cash to survive. Honeywell has underperformed Microsoft by 34% YTD. Massive discount relative to history
ETF considerations:
· FUD - First Trust Value Line® Dividend Index ETF (CAD-Hedged) (Low Volatility & High Dividend Yield & Safety Rankings based on Balance Sheet Strength)
Fact Sheet | Holdings
· RDVY - First Trust Rising Dividend Achievers ETF (Quality, History of increasing dividends, Value)
Fact Sheet | Holdings
Investment Opportunity #2: Mid Cap Growth stocks
· Small and Mid cap stocks have severely underperformed
· Russell 2000 is down 27%, S&P 500 equal weight is down 21%
· Look for mid cap companies in Technology, Health Care and Communication Services
ETF considerations:
· FNY - First Trust Mid Cap Growth AlphaDEX® Fund (Half the portfolio is comprised of Healthcare and Technology, lower valuation to the overall market)
Fact Sheet | Holdings
Investment Opportunity #3: Small Cap Value stocks
· If you look back to 2009, the two best factors were size and value.
· The challenge is that this is a very difficult trade to execute on. Most investors are looking to harvest capital losses in these stocks, currently no analysts are recommending these stocks
· The lesson in 2009 is that these companies get excessively discounted. For the small cap companies that survive, spectacular returns await 2x or 3x original investment
· As an example consider Six Flags Theme and Water parks. Started the year at $45.11 on January 1. On March 18th it was $10.36. They currently have $174 million in cash on the balance sheets with $2.5 billion in debt. Last week they cut their dividend to zero and raised capital $725 million at 7%. The deal was 7x oversubscribed or $4 billion and they paid a lower rate. They are trading at $15 last night and have enough liquidity to survive.
ETF considerations:
· FYX – First Trust Small Cap Core Alphadex Fund
Fact Sheet | Holdings
Do you continue to recommend Health Care and Technology?
Yes, Technology and Healthcare offer lower risk and should be accumulated on pullbacks in the marketplace especially if you are under-weight these sectors. Technology, Healthcare and communication services represent ~ 50% of the S&P 500 index.
Information Technology
· FHQ/FHQ.F – First Trust AlphaDEX™ U.S. Technology Sector Index ETF (Back to Back Lipper Award Winning ETF. Technology will lead the recovery)
Fact Sheet | Holdings
· FDN –First Trust Dow Jones Internet Index Fund (41 companies designed to represent the largest and most actively traded stocks of U.S. companies in the internet industry)
Fact Sheet | Holdings
· CIBR –First Trust Nasdaq Cybersecurity ETF (42 companies designed to represent the cybersecurity segment of the technology and industrials sectors)
Fact Sheet | Holdings
Health Care
· FHH/FHH.F– First Trust AlphaDEX™ U.S. Health Care Sector Index ETF (Defensive sector with growth characteristics, holdings include Regeneron, Abbott Laboratories, Gilead Sciences, Johnson and Johnson)
Fact Sheet | Holdings
· FBT –First Trust NYSE Arca Biotechnology Index Fund (30 companies designed to measure the performance of a cross section of companies in the biotechnology industry that are primarily involved in the use of biological processes to develop products or provide services)
Fact Sheet | Holdings
Would you buy energy at these levels?
· Energy price collapse was more a technical short-term issue and less of a long term price signal
· Many private companies will go bankrupt as well as publicly traded companies.
· The market is telling you the best companies will survive Exxon, Chevron, EOP, Schlumberger.
· The market will not punish companies like Exxon who cut their dividend as the market wants them to survive and be able to buy cheap assets. Demand has hit an all time low.
For Institutional Use Only. Not for Public Distribution.
This document was prepared by First Trust Advisors L. P., and reflects the current opinion of the author(s). It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. Such statements are generally identifiable by the terminology used, such as "plan", "anticipate", "intend", "expect", "estimate", or other similar wording. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors that are beyond the control of the Funds, FT Portfolios Canada Co. and its affiliates, and First Trust Advisors L.P. and which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market and business conditions; fluctuations in securities prices, fluctuation in interest rates and foreign currency exchange rates; and actions by governmental authorities. Future events and their effects on a fund may not be those anticipated by us. Actual results may differ materially from the results anticipated in these forward-looking statements. We do not undertake, and specifically disclaim, any obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise. This information does not constitute a solicitation or an offer to buy or sell any security. (04/2020)
Copyright © First Trust Portfolios
