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Finding Value in a Sea of Bubbles: Stocks to Win When the Cloud Bursts

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  • (1:25) - How Avoiding Technology Stocks Built a Strong Value Model
  • (6:35) - Imagine Buying RH at $25 and Still Seeing Growth Ahead
  • (14:00) - What's Driving Signet Jewelers Shares?
  • (17:15) - How Brick and Mortar Thrives in an E-commerce World
  • (22:30) - Emles Alpha Opportunities ETF: EOPS
  • (26:45) - The Coming Inflection Point: Tech Bubble vs. Value-Growth
  • (33:00) - Keeping His Shorts on a Short Leash... For Now
  • (37:15) - The Best Time to Invest In Defense Stocks
  • Mind Over Money Archive


“I can calculate the motion of heavenly bodies, but not the madness of people.” Isaac Newton

Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.

That quote from Isaac Newton was his reaction to the South Sea Bubble of 1720 where he lost a small fortune. I used it in the opening of my first article on behavioral finance published in 2008 where I suggested that every investor had his or her own “inner rogue-trader” who could destroy wealth if given enough of a chance.

The trick was understanding behavioral biases, especially one’s own habits of thought, emotion, and decision-making under uncertainty and risk, that often make our money fly away on wings of greed, or disintegrate into depths of despair.

I also suggested that high-profile rogue traders who usually lost billions for their employers (the most recent had been Jerome Kerviel at SocGen who evaporated $5 billion euros in his scheme that finally surfaced in January 2008), would never disappear from the headlines because the reckless, larcenous aspects of human nature would not be repealed any time soon.

Six months later, we learned of Bernie Madoff and his giant ponzi that wrecked wealth from NYC to Hollywood.

I revisit the timeless Newton quote today because our guest is an institutional investor who lives to avoid the madness of crowds, bubbles, and other money-burning pursuits.

Searching for Value in a Sea of Bubbles

What if you could combine the best of hedge fund strategies, including short-selling and active management, with a safer value approach to stock-picking?

And what if I told you that a particular such strategy has clobbered the market for nearly a decade -- all while holding absolutely zero technology stocks?

My guest today is a portfolio manager who has done just that.

Nathan Miller runs a model fund for Emles Advisors, which has recently launched an ETF that follows his team’s investment strategies in just 3 or 4 sectors including consumer, retail, and industrials. The Emles Alpha Opportunities ETF holds a unique basket of value-oriented stocks, some of whose names might surprise you: Restoration Hardware (RH - Free Report) , Signet Jewelers (SIG - Free Report) , Camping World Holdings (CWH - Free Report) , and Lockheed Martin (LMT - Free Report) .

EOPS is one of the first actively managed long/short ETFs with the goal of bringing a thematic hedge fund-like product to the broader market. Emles also provides full transparency of positions and trading activity via their website so investors can track all the holdings and percentage allocations, including their short positions.

Mr. Miller calls himself a "contrarian-value" investor who follows a quantitative methodology devised over decades managing money for the likes of Citadel and RBC Capital. He's spent a lot of time as an analyst for Industrial and Defense stocks too, and so not surprisingly, he knows how to play defense throughout economic cycles.

Value Hides in Dominant Brands with Solid Growth & Thick Margins

But what struck me is that his approach to stock-picking doesn't have him behind the market and complaining that it's “just not time for value... yet.” He's done amazingly well on several metrics, and right now, with sky-high valuations in cloud stocks, he sees an “inflection point” in the current cycle that investors can take advantage of without running to cash, or trying to time the next hot industry.

In the podcast interview, Nathan describes his team’s methods and goals and we learn why they are investing their own money in the new ETF as they envision that inflection point coming soon to a stock market near you.

Even though the Emles Alpha Opportunities ETF was just launched in June, they have commissioned an audited track record of positions and trades for their strategies, prior to the ETF, that will soon be publicly available.

So in the podcast, when you hear him talk about their incredible performance numbers, know that this data should be viewed by investors in their own due diligence. And while historical performance is no guarantee of future returns, many highlights are worth noting, as in their outsized performance against a benchmark like the Russell 2000 index for the past 9+ years.

One of the best parts of our discussion is how he explains his stock-picking process and the focus on franchise dominance, superior earnings growth and sustainable margins that act as a ballast during recessions. In other words, these are the companies that will survive just about any economic cycle gyrations.

Bubbles in the Clouds

But before we got to that golden take-away, I had to start off our discussion with my top burning question: Why no technology stocks -- and more importantly, how have you beaten the market with this strategy over many years and a couple of cycles?

Nathan gives such a convincing case that even if I’m not ready to sell my NVIDIA or Square shares -- I could argue they are industrial and consumer if I wanted to -- I am ready to plan for the next “inflection point” by having a lot more exposure to solid value franchises that can weather the storms, instead of just hiding out in cash.

In fact, Nathan has a formula for when you buy “contrarian-value” that also seems very reliable and robust. And he should after all, since he’s made studying these cycles his life’s work since the first Tech Bubble 1.0 some twenty years ago.

Eventually, I get around to asking him about his approach to shorting stocks and two names in EOPS that stand out: Tesla (TSLA - Free Report) and Peloton (PTON - Free Report) .

The fascinating aspect of the Emles strategies is that while many of their value plays are soaring -- just like the cloud stocks which trade at 20-30 times sales vs. 5-10X earnings for EOPS favorites like Kohl’s (KSS - Free Report) -- when the cloud bubble eventually does burst, these strong value dominators could be in for many more years of outperformance.

Brick & Mortar is Alive & Well

In the interview, I get Nathan to expand on his thesis for RH and Signet. If you don’t understand the dominance of these two franchises -- and their spectacular earnings growth in a strong consumer economy with pent-up demand -- be sure to listen as he explains what these companies have accomplished and why they will continue to dominate.

For Signet, I truly didn’t see this resurgence coming -- even though the stock had consistently been a Zacks #1 Rank for years. So I asked him “What’s the story here? Is it luxury spending via the stock market wealth-effect? Is it all the weddings that got postponed last year? Is it a surge in pandemic romances I'm not aware of?”

And since Nathan also digs companies like Kohl’s and Camping World, I wanted to know “How does brick-n-mortar retail still win in a new world where everyone seems to order online?"

Plus, I get him to explain his approach to Defense and Industrial companies since that was his old wheelhouse as a research analyst at Goldman Sachs. He gives the perfect reason for owning Lockheed Martin as the "anti-cyclical" play -- if you buy it at the right time.

Will the Tech Bubble 2.0 End Badly?

Nathan Miller is a student of market history. And he doesn’t see how most investors will escape the current cloud bubble unscathed.

As I often talk about here regarding short-term market exuberance, there will always be a big pendulum swinging between extremes of pessimism and optimism. You want to be sure to buy the former so you can sell the latter.

But the Emles team is focused on doing this without the extra risk of Technology stocks.

Nathan says...

“Value investing works best when we can own stocks that are out-of-favor, that are trading well below their intrinsic value. While the largest components of EOPS have been massively beating and raising earnings over the last 6-12 months…their stock prices have not kept pace with the dramatically improved earnings power.”

He explains further that as a result, the basket of value names in EOPS now trades at less than 9X 2021 EPS (vs. 15X six months ago), vs. 30X for the Russell 2000 and vs. 22X for the S&P 500. That's the kind of earnings momentum we like and why several of his companies are in the upper tiers of the Zacks Rank.

“We think this is likely to mark an inflection point in stock price performance, as stock prices and earnings power are tethered to each other in the long run. Our EOPS value basket trades at the lowest multiple it’s traded over the last 10 years (we are at trough valuation). It’s always possible that they can trade lower, but we view this is a coiled spring with upside much more likely than downside from here.”

As sure as Len Zacks quantified the principle, over 40 years ago, of earnings estimate revisions driving stock prices, the dynamic remains foundational for every new, hardnosed stock market investigator who does the research on their own, like Nathan Miller.

Be sure to tune in to the podcast to get all the goods from Nathan and Emles on what sounds like an essential component for investment growth and wealth preservation.

Again, I'm not selling my NVDA and SQ just yet, but I am looking at what franchises will outperform when the Tech Bubble 2.0 takes a big breather.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader portfolio which holds NVDA and SQ shares.

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