Watching the 'Big Money' for Great Setups

By Enrique Abeyta

Monday, May 3, 2021
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Editor’s note: We’re taking a brief pause from our normal fare to share a series of essays from our colleague Enrique Abeyta, editor of our excellent Empire Elite Growth service.

Enrique is extremely bullish about a “grand reopening” as we put the COVID-19 pandemic in the rearview mirror. And as he explains today, the moves from big institutions can provide great opportunities on stocks in certain sectors…


The start of 2021 certainly put to rest the efficient-market hypothesis in the short term…

For folks unfamiliar with the hypothesis, this is an academic theory stating that, at any particular point in time, every stock is “perfectly” priced, taking into account all the information available.

Any experienced market participant who has seen dramatic moves in stock prices in the short term knows this is far from true. Over a shorter time frame, it’s always about the balance of buyers versus sellers.

Prior to joining Empire Financial Research, I used to say that the reason stocks went up was due to the presence of more buyers than sellers. But my partner Whitney Tilson corrected me… and pointed out there were always the same number of buyers and sellers. As a result, I’ve amended this by saying it’s the presence of more enthusiastic buyers than sellers.

In the intermediate and long term, perhaps there’s some correlation between stock prices and the underlying business… but even that is somewhat tenuous. However, it’s clear that in the short term, the prices of stocks are really just governed by the balance of liquidity – the enthusiasm of buyers versus sellers.

At this point, I could easily talk about the historic moves that we’ve seen as a result of the mobilization of an army of small investors via digital platforms like Reddit’s WallStreetBets forum – just look at the stock move of video-game retailer GameStop (GME).

In today’s essay, let’s consider the actions of the big institutions: pension funds, mutual funds, and other traditional institutional managers…

While quantitative trading and exchange-traded funds (“ETFs”) have likely taken over the majority of trading in the market, these types of institutions are still major players and can drive the prices of many – if not most – stocks.

One of the most interesting aspects of their trading is how their “rotations” – the thematic trading they sometimes undertake in their portfolios – can affect stocks in the short term.

While they certainly do look at “bottom up” stock ideas with individual analysis of companies, the big players spend a lot of time thinking about the world thematically.

Perhaps it’s the view that an acceleration in inflation will have a positive effect on financials or that a re-acceleration in the economy will affect cyclicals… but they take these views and then adjust their “weightings” in sectors accordingly.

And when they do this, they don’t tend to be particularly price-sensitive on individual securities.

They simply take a weighting down in a certain sector from, say, 12% to 10% and then often will do the same across all the names they own in that group.

When enough of the institutional players do this together, the result can lead to deeply oversold situations in stocks that actually have strong fundamentals…

This is a situation we’ve frequently taken advantage of in my short-term trading service, Empire Elite Trader… and several times a year, we see it emerge across a whole group of stocks.

At one point in 2019, we saw it in interest-rate-sensitive stocks. Today, we’re seeing it happen in a group of defensive stocks as well as stocks that are benefiting from the COVID-19 situation.

As we begin to see blue sky through the clouds of the COVID-19 recession, institutional money managers are “rotating” into recovery plays.

This clearly has been happening already… but there are a lot of these big players, and some move quicker than others.

As these institutions are doing this “rotation,” they’ll look to sell positions. Earlier this year, they were paring down their positions in more defensive companies that COVID-19 hadn’t hurt as badly.

In fact, some of these companies were beneficiaries of the situation…

As more and more institutions sell these positions without the presence of as many incremental buyers, the stocks can get deeply oversold.

And yet, nothing has changed with these companies.

They were well-positioned fundamentally before the rotation began, and they’re still well-positioned now.

In fact, the rotations can push some of these names to historic oversold levels.

And right now, I’ve found seven of these names poised for big upside ahead…

I believe these are the perfect candidates to skyrocket as the pandemic comes to an end and the recovery hits full stride.

Across the globe, each day, millions of people are being vaccinated against COVID-19.

They’re itching to get back to the things they enjoy – traveling… going to concerts… and cheering on their favorite sports teams.

This pent-up demand will set up certain stocks for a huge surge in the months ahead… and I’m expecting triple-digit gains in all seven that I’ve identified as this trend plays out.

Keep in mind that the reopening has already started, so you need to act fast in order to take advantage of this move before it’s too late. In a brand-new presentation, I share all the details… Learn more here.

In the mailbag, a reader writes in with a general question about how to get started in the markets, and another asks about a stock that I mentioned only in passing…

What possible COVID-19 recovery stocks are you watching? Have you pulled the trigger yet? Let us know by sending an e-mail to [email protected].

“I was set to buy Nokia (NOK) on Friday when I read a comment from Berna saying not to buy. Could you go into more detail as to why it is not recommended, as the comment didn’t say too much about it. I have recently seen it on several buy lists.” – Nadia B.

Berna comment: Nadia, I don’t have a strong opinion on NOK shares. They had spiked sharply in late January on WallStreetBets enthusiasm and the resultant short squeeze that ensued. My point was that chasing short squeezes isn’t a great investment strategy.

Revenue and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) have been going sideways for five years at Nokia, in an industry – telecom equipment – that is generally growing. I haven’t spent any time on this company in more than a decade, because I don’t find it very interesting. Its stock has literally been going sideways to down since 2014, save the short squeeze.

If Nokia has some new technology that could be a game changer, perhaps it would be worth some investigation. But save for the emergence of some new piece of tech at the company, it looks pretty fairly priced… but I’m not an expert in Nokia these days.

“Please forgive my ignorance of the whole investment world but I subscribed to your letter recently, and have been reading it ever since. I am immensely intrigued (and astonished) at how some of you have reaped such tremendous gains in the stock market and, of course, that makes me want to participate.

“Problem is, I am 79 and have precious little resources. Where do I start? I assume I will need a broker. Can I start with as little as a few hundred dollars? And, of course, what investment would you recommend that would allow me to invest?

“Thank you in advance of your response.” – Roger C.

Berna comment: Roger, it’s never too late to get started in the markets.

I would recommend that you only invest what you can afford to lose and make your positions small as you get started. To minimize your costs, I would use a zero-commission online broker with simple user interface, like Fidelity, Vanguard, or Charles Schwab.

I would source your investment ideas through your reading – including the free picks from reputable newsletters, like the ones I make in Empire Financial Daily. You should also keep up with the business news by reading newspapers and magazines. If there are areas of the market where you have expertise from your work life, I would lean hard into looking for ideas in those sectors.

You can also think about which companies you are a happy customer of and begin to research if their stocks are attractively valued.

You might want to start out by investing in larger-cap companies, which tend to be less volatile than small caps.

As I said, start small… and track your investments through reading about the companies’ quarterly earnings and other news.

Because you mention you have limited resources, make sure only to invest money that you can afford to lose – please don’t invest money you need for basic living expenses, like rent, health care, or groceries.

Regards,

Enrique Abeyta
with Berna Barshay
May 3, 2021

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.