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Empirical Research Partners will pursue “a little less offense” in terms of portfolio strategy for March, in a stock market where it sees few “obvious opportunities.”
The broker-dealer and investment advisor said it is “inclined to reduce” holdings of stocks of semiconductor and semiconductor equipment manufacturers.
“Our strategy involved balancing GARP(y) stocks, which generate a lot of free cash flow, much of which comes from the technology sector, with a number of low-multiple cyclical stocks, including homebuilders, banks, railroads, certain metals and energy issues,” Michael Goldstein, managing partner at Empirical Research, said in a note Friday. GARP refers to “growth stocks at a reasonable price.”
“Semi-finished and equipment stocks, which have been a long-standing theme in our work, are now trading at a P/E premium of +50%, returning to late 2018 levels, and we are inclined to cut them a little bit,” Goldstein added.
According to a portfolio built by the research firm using its core model, the recommended weight for semiconductors – Nvidia (NVDA), Broadcom (AVGO), Qualcomm (QCOM) – is at 7.5%, compared to the current weight of 10 .3% in the S&P 500 (SP500).
“(The portfolio is) very different from its predecessors in that it no longer towers over the technology sector, including semi-auto. It bets on homebuilders and banks, and is otherwise broadly diversified,” Empirical Research said.
One of the main drivers of Wall Street’s current bull run has been the advance in stocks of semiconductor and semiconductor equipment manufacturers, along with AI-related stocks.
Bespoke Investment Group noted that the Philadelphia Semiconductor Index (SOX) traded at a higher price than the benchmark S&P 500 index (SP500) for the first time on Thursday.
Empirical Research also believes that a combination of disinflationary hopes and the strong Q4 2023 earnings season has led to a lack of “clear opportunities” for investors.
“The price paid for revenue growth has returned to late-2019 levels, even though long-term rates are double what they were then. Large free cash flow generators no longer look unusually cheap,” Michael Goldstein of Empirical Research said.
“Given the optimism, the beleaguered consumer staples and utilities sectors are selling at unusual discounts to the market and their nine-month price dynamics statistics are near 70-year lows,” Goldstein added.