Investors should avoid the temptation to buy the dips in expensive high-growth stocks because “once the fever breaks, it lasts a long time,” according to Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management.
Slimmon joined Bloomberg's “What Goes Up” podcast to discuss what he’s investing in these days. He also explains how the MSIF US Core Portfolio fund he co-manages beat the S&P 500 with a 36% gain in 2021. Below are the condensed and lightly edited highlights of the conversation.
Q. You wrote to us before the show, saying “avoid the temptation to step in and buy into the selloff in high-growth stocks.” You said, “my experience is: Once the fever breaks, it’s done for quite a while.” Historically, is there any precedent you could point to? Is it too simple to point to the dot-com bubble as a fair comparison?
A. So first of all, I just want to make sure it’s understood: I’m not a value manager, or a growth manager. I’m not trying to, you know, spin what works or what my investment philosophy is at all times. I’m just looking at what the fat pitch is. And as it pertains to this group, the reason why I believe once the fever breaks, it lasts a long time, is if you wind the clock back, if you look at some of these uber-growth funds back to where they were in early fall of 2020, that means a lot of people haven’t made money, right? Because they chased into them after they peaked.
And the reason why the dot-com analogy is correct is that that means that every time they start to go up, there’s someone that can get out even. And so there’s tremendous selling resistance at higher levels because so many people have lost money. And that to me is very similar to the dot-com bubble, and other bubbles. Once a very speculative bubble breaks, it’s not a V bottom because there’s too many people looking to get out.
Q. So what cohort would you look at? Could you see the Nasdaq 100 going down as much as it did then, or more like a Cathie Wood-type of fund?
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A. That’s the difference to 2000. In 2000, the Nasdaq had obscene prices. You also had some of these very big-cap tech stocks trading at triple-digit multiples. And when I look at these uber-growth stocks, they’re expensive as they were in 2000, but the main tech stocks, the Nasdaq 100, the big stocks, they’re not as expensive. So I don’t think the (comparison to the) Nasdaq break of 2000 is quite accurate because I don’t think the really big tech stocks are as vulnerable.
Q. One thing I always think about along these lines is that there’s something in human nature that is always going to make that instinct to chase the high flyers come back at some point.
A. Greed.
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Q. Yeah, right. As simple as that. But what are the conditions you would look for to be in place to bring that trade back?
A. Well, I think it’s first seller exhaustion, where stocks stop going down on bad news because there’s no one left to sell them. And I’m just not sure we’re there yet. I haven’t seen big capitulation. I mean, the stocks are down a lot, but there hasn’t been big capitulation in these stocks. The other way I think about it is when no one believes that they can buy the dip anymore. That’s when the bottom happens, right? When people say, “I don’t wanna touch them. These are uninvestible,” that’s when I get interested. But when people are saying, “Hey, well, what do you think?” Because the memory of making a lot of money is too recent and that leads people to try to bottom fish.
I’ve been in this business a long time. Human behavior doesn’t change. And so when this type of bubble breaks, you get counter-trend rallies and they go up a little bit and then they go down low and then they go up and they go down until people say, “Don’t ask me one more thing about it. I don’t want to talk about it. Moving on.” And then I go, “Oh, that’s kind of interesting.” That means maybe they’re getting to a bottom.
Q. Your fund was up 36% last year. Everybody at home is wondering what exactly you might be favoring this year and how they should be positioning as the year unfolds?
A. The reason why we had a good year last year is simply that we played the playbook. The playbook is that when you’re coming out of recessions, cyclical stocks do well, right? Because in recessions people sell anything that’s economically sensitive and they hold on to things that they perceive as not economically sensitive. So the spread between the cyclical stocks and the non-cyclical stocks, it’s extreme. And boy oh boy did it really get extreme. So it was kind of a fat pitch to own financials and energy stocks in 2021. And so that worked. The other thing that really worked is just listening to companies and follow earnings. Now, just to be clear, earnings growth doesn’t drive stock prices, it’s surprises, right? A stock price embeds all future expectations. So if companies are doing better than what is expected, they go up ...
So going into this year, I think we’re in an environment where central bank policy is willing to accept higher levels of inflation for faster growth that will lead to more wage growth. Now right now, the Fed is starting to pivot a little bit because real wages aren’t going up. So I think they’re going to make a move to bring down inflation, but I think we’re moving into an environment where we’re going to have higher growth at the expense of higher inflation. And that’s an environment where you want to own some value stocks. Again, I’m not saying throw away all your growth stocks to buy all value because I believe in technology long term. But I do think that we’ve come out of a decade of slow growth and we’re moving into a faster-growth environment. And I think you want to own a few more value stocks. And I don’t think this year will be any different than last year.
Q. You sent us a list of some stocks that you really like: Alphabet, Microsoft and Danaher. Could you walk us through why you like these picks in particular?
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A. Our biggest overweights are financials, REITs and energy stocks. The “however” of that is those stocks are red-hot right now. Financials and energy have done really well this year. So I think we’re into an environment where you have to be careful going into earning season, given how strong they’ve been. And so I’m just a little bit wary of owning those stocks or buying those stocks right here. And again, those growth stocks haven’t done as well. Microsoft, Google, Danaher, they haven’t done as well because they’re not hot stocks right now. And those companies are reporting very good earnings.
Q. You’re bullish on Microsoft, you have it in both the international and the US core fund. Curious what you think of this Activision Blizzard takeover this week? And what does that signal to you?
A. It’s a sign that companies are flush with cash, which, oh, by the way, what’s the ROI on cash right now? So I think it’s going to be a -- I’m no investment banker -- but I think it’s going to be a big year for M&A because companies have very strong balance sheets and they got a lot of cash on hand and they’re going to be looking for bolt-on acquisitions. So to the extent that things are immediately accretive, I think you’re going to see companies jump at it.
And not a lot of people talk about that, but I really think that the story is that corporate fundamentals are not getting the press they deserve. I really do. We talk about the Fed a lot and geopolitical risk, but I just don’t think what’s happening in corporate America gets enough positive press.
Photo: Bloomberg
