Wed. Sep 23rd, 2020

Top Fund Manager Says These Stocks Should Soar In The Next Market Rally

Top Fund Manager Says These Stocks Should Soar In The Next Market Rally

Chip Reed is a mutual fund manager who winces at the widespread pain and suffering caused by the coronavirus stock market crash. But he also sees the coronavirus crash as setting the table for the sort of rally mutual fund shareholders dream of.


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“The pain isn’t lost on anybody,” said Reed, a manager of $11.7 billion Eaton Vance Atlanta Capital SMID-Cap Fund (EISMX). “And it’s probably more widespread than it was in the financial crisis of 2008-2009.”

Reed added, “But my job is to take advantage of market dislocations and position the portfolio for an eventual recovery. I’m doing it for people like firefighters and teachers, normal people trying to protect their retirement savings.”

It’s something Reed and his fellow managers do well. Their fund is an IBD 2020 Best Mutual Funds Awards winner. It beat the S&P 500 in 2019 and in the three, five and 10 years ended Dec. 31.

Coronavirus Stock Market Crash Sets The Stage For A Rally

And Reed sees this coronavirus stock market crash as creating investment opportunities on behalf of those regular folks. He sees companies he’s long liked priced more attractively in this downturn. He’s also taking a fresh look at stocks not worth buying weeks ago at higher prices. Many are likable now in the stock market today at new, lower valuations created by the coronavirus crisis.

“We’re always trying to buy truly great businesses,” said Reed, who runs the fund with William Bell and Matthew Hereford. “They’re not often on sale. But some are on sale now. You have to be able to pick great businesses that will survive and be successful. And you have to have a long time horizon.”

Stocks This Mutual Fund Likes During The Coronavirus Stock Market Crash

FactSet Research (FDS) and Trimble (TRMB) are two companies the small and midcap managers expect to rally strongly after being beaten up during the coronavirus stock market crash.

In addition, Reed and his teammates have bet on some stocks they expect to hold up better than most others through this meat grinder of a stock market. Pool (POOL) and Bio-Rad Laboratories (BIO) are two holdings in this group.

They should benefit from the rebound, too. “It will come,” Reed said. “We just don’t know exactly when. Frankly, this downturn will last longer and be more painful than most people anticipate.”

Trading More Often Than Usual Amid The Coronavirus Stock Market Crash

Throughout the portfolio, with valuations lower on nearly every stock due to the coronavirus stock market crash, Reed says the fund is able to swap out higher cost shares for lower cost-basis shares in names the fund likes. The fund is also able to buy stocks it likes only at their new, lower prices in today’s market. “This is a good time to be an active manager,” Reed said. “You can take advantage of a lot of opportunities.”

This fund has been far more active than it usually is. “We’ve traded far more in the past month than in the previous year,” Reed said.

Why FactSet Is Appealing Despite Its Nose-Dive

FactSet plunged 34% from its Feb. 19 close through Monday. But after rallying on Tuesday and Wednesday, it was back to only 22% off its Feb. 19 close.

“They obviously have a core competency in providing financial information to investment professionals like ourselves,” Reed said. “But what they’ve done in the last few years is penetrate more into back offices of existing customers. So now they supply not just market data to portfolio managers but also market data to client service professionals and pricing services for the accounting side of an asset manager.”

By servicing more departments within each customer, they make themselves more important to each customer. “Most people want to do business with fewer vendors,” Reed said. “FactSet benefits from that general trend.”

And FactSet’s market has expanded beyond investment professionals into the world of investment advisors. “They desire the same information I get, so FactSet has been able to grow that side of their business too,” Reed said.

Trimble Gets Its Bearings

Trimble makes positioning and navigational products. Its technologies are used for modeling, connectivity and data analytics. Its customers are in agriculture, construction, geospatial and transportation and logistics.

Trimble shares lost 54% of their value through March 18, but have rallied since then.

“Since the start of the sell-off it has underperformed,” Reed said, pointing to a sharp contraction in industries Trimble sells to, travel and commercial shipping, due to the coronavirus stock market crash.

But the company derives more revenue from subscribers to its data and less from sales of hardware that show people where they are. “In recent years, a lot of their business has become subscription oriented and less equipment oriented. Our expectation is that it will be less cyclical in this downturn than it was five or 10 years ago in previous cycles. We expect them to rebound strongly.”

Investors Dive Into Pool

Reed says Pool is poised to be a stock that fares relatively well through the downturn. But why shouldn’t a company that’s focused on discretionary recreation be hurt more?

“Eight to eighty-five percent of their business is existing swimming pools,” Reed said. “Another 10% is from new pool building. Yes, that part of their business is completely shut down. But the other 80% to 85%, if you have a pool, you must buy the chemicals to keep it from turning green (due to excessive algae). That’s why this stock has held up relatively well.”

From the broad stock market’s Feb. 19 high, Pool shares were down 22% going into Wednesday. The S&P 500 was down 27%, according to Morningstar Direct.

Pool ranks No. 1 in IBD’s Retail-Leisure Products industry group, according to IBD’s Stock Checkup.

Its three-year annual earnings per share growth rate is 23%. Sales grew at an annual average of 8%.

Bio-Rad Labs: Sellings Picks To Gold Miners

Bio-Rad Labs makes test systems for clinical diagnostics. There’s a good chance this company will gain sales of test kits aiming at identifying victims of Covid-19, Reed says. “That makes them like companies that sold picks and shovels to miners in the Gold Rush,” Reed said, referring to the mid-19th century when hundreds of thousands of people flocked to California in search of fortunes.

Reed said, “All of the people trying to develop vaccines and drugs to combat Covid-19 use Bio-Rad Labs’ equipment and products and assays (tests of a drug’s components and determination of whether it contains infectious agents or antibodies). They are the supplier to all people trying to develop something to identify and treat this coronavirus.”

Bio-Rad Labs shares were down 16% since the closing market peak.

How To Benefit From The Coronavirus Stock Market Crash

Why should anyone invest in a fund likely to decline amid the coronavirus stock market crash? Because a mutual fund shareholder wins when his or her fund declines less than the overall market in a downturn. And shareholders benefit when they invest in the fund as it enjoys the often explosive start of a rally, Reed says.

Stock mutual fund shareholders who try to time the market by going to cash or bonds commonly to miss out on those powerful starts to rallies. “You make money in bear markets,” Reed said. “You just don’t know it at the time. We try to provide downside protection. At the same time, we position the portfolio for the other side, the rally.”

Reed added, “That’s the advantage of active managers. We can take advantage of a volatile market.”

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and strategies of the best mutual funds.


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