Bad News is Good News, Again?

Published Sep 3, 2021, 6:36 PM

Some economic reports are coming in weaker than expected as the back-to-normal recovery drags on. To many investors, it means the Federal Reserve will keep the punch bowl fuller for longer. Kim Forrest, founder and chief investment officer at Bokeh Capital Partners, discusses about why bad news can be seen as good news again in this environment and why she prefers tech stocks for the long run.

Mentioned in this podcast:

U.S. Companies Add Fewer Jobs Than Forecast, ADP Data Show

Megacaps Hit All-Time High in Defensive Stock Tilt: Markets Wrap


Hello, and welcome to What Goes Up a weekly markets podcast. My name is Mike Creagan, and I'm a senior editor at Bloomberg and I'm val Donna, hi across asset reporter at Bloomberg. And this week on the show, while the SMP fire just kept a seventh straight monthly gain, it happened in the same month that Federal Reserve officials made it pretty clear that they're ready to start taking their foot off the gas pedal. When it comes to the stimulative monetary policy that's been so important for this rally, how much of the rally actually has been due to that stimilios and how much was due to the ebulent investor psychology that accompanied it, and how should we think about what happens now. We'll get into it with a chief investment officer who actually helped start her own new firm just about two years ago. But first, vill Dona, some trivia I just learned about you and this chief investment officer. Neither one of you has a middle name. That's true, right, that's true, that's right. Yeah. Her name is Kim Forrest. She's the chief investment officer at Boca Capital Management. Kim, Welcome, to the show. Thank you, thank you for having me. Yeah, Kim, let's just start off before we get to the actual nuts and bolts of your views on the market. Tell us a little bit bit about this firm. I know you just started it in what two thousand and nineteen. UM You're based in Pittsburgh, right, Give us a little bit about how it all came about and sort of what your strategies are. Sure, So, I have been a uh PM for probably about I don't know, sixteen years, and before that, I started this career as a cell side analyst covering software stocks. Before that, I was a software engineer for thirteen years. And I found this world because I went to an MBA program to become a salesman essentially of UM software and services. And I thought I needed to get the vocabulary of business, so I got an m b A and instead I changed careers. It's so crazy because I found finance and I love it. So so that's how I got here. And I guess I'm entrepreneurial by nature because I've always kind of been itching to do my own thing, and in twenty nine I finally took the leap. So I'm a equity analyst, and we have some strategies here that are based off of the core of what I believe, and that's growth at a reasonable price. I believe that the markets always reward growth, but UM, you should be prudent about putting your money to work. So that's kind of um what we do, and we do it well. And Kim, you and I have been talking for a couple of years now. One of the things we very frequently talked about is your pets and my pet So maybe you can touch on that a bit. But I also want to ask you about UH tech. I know you and I have talked about tech a million times. I think you like certain chip companies. I think you like the five G space. Maybe one of your main funds is up forming them this year. So maybe you can tell us a bit more about your your strategy. Sure, and we'll leave pets to UH in a couple of minutes. So so right, Probably because of my first career as a software engineer, I see things through the lens of trying to find really good companies that use technology really well. What I discovered, um, when I was on the software gig was that certain companies would kind of do well, not so great things with technology that's been a whole lot of money. It was cool, it was cutting edge, but it didn't do much for them as a company. So that's the kind of software I try to stay away from, right is. You know, just because it's cool doesn't mean it's good. So I'm looking for productivity. So that's the thread again, growth a reasonable price, but companies that can really deploy technology well. And I also like companies that make technology. Um. Right now, I've figured it out that at the very core of any kind of software is hardware that runs on a chip. So I've been really investing in chips to the uh, you know, I haven't really found a whole lot of software companies that I like at this point, but chips look cheap and um. Even though we started right running this portfolio right at the beginning of covid UM, chips have really performed well and they're constrained. But here's the thing. We're going to need more next year and the year after and the year after, and I think we're under um estimating how many chips we're going to need because of five G bringing us Internet of Things to be finally a thing in the in the corporate world, and I don't bring up pets just to bring up pet Mike. I don't know if you've read Kim's annual reports, but she she has included I think you once included a picture of your chickens. Was it this past year? I think so. Yes. I have four chickens and everybody works in this house. They lay eggs. They are all egg producing. Um. I haven't had to buy eggs from the store in a very long time, and I'm glad because my eggs are golden and tasty and not like those sad, mass produced yellow eggs. I saw a picture of your chickens. I'm very jealous. I'm an aspiring backyard chicken farmer myself, but uh, my neighbors are not do not share my aspirations. So I'm not sure if we could uh make that happen. Maybe in retirement, I'll get get finally get those chickens. Um, Chem. I wanted to unpack a little bit about your approach to uh looking at chip makers, um and I have a lot of questions about this, and as just my style, I might pack them all into like a thirty part question for you, so so stand by for that. But but but I feel like a lot of investors get intimidated with the semiconductor space because there's so much going on, there's so much nuance, and also there's so much sort of there's this like boom and bust cycle of of supplying demand. Um. Obviously now we're in this still in this kind of mismatched supplying to demand environment where everyone needs chips. Uh, they're not making enough, you know, for carmakers and other applications. But let's start first with that idea of the sort of you know, the the cycle for chip makers, which it doesn't seem to always be correspond with the regular economic cycle. It kind of has its mind of its own um and the share prices kind of through their own thing as well. So is it, you know, do you try to time that cycle uh to sort of get in and out of these names along with it, or is that is is that as foolish as trying to time the regular market as a whole. That is an excellent question with multi parts. So here I'm going to take a shot at it. First, to the timing aspect um, I think we're always surprised, both to the upside and downside. We're rational people. We look at things and we say, X, Y and Z are going to happen, and then ABC happens. Right, So I try to take most of the timing away from any kind of thing other than today's price. Like I have a little band of maybe sixty days where I look at something and go, that's gonna come back down. I can wait for that, right, So that's my at a reasonable price. Um. That being said, in the world of chips, there are definite pockets and you can even though you're not a technologist, you can figure these things out. For example, there's one um it's called Micron. It's one of the names we own, the ticker symbols M you. And one of the things that they make is this stuff called nand N A N D And that is a way it's it is a chip, but it is really um storage. Right. It doesn't have to have electricity. You can put stuff on it. It's like those little cards that used to have for your camera or your phone. Right that that's that is what we're talking about. So that definitely has boom and bust cycles. And it's only because only eight companies make it. So when somebody brings a new line or a new fab online that kind of destroys the whole supply demand um curve. Right, So then the chips get cheap because you know, these are unbelievably expensive fabricating plants. They have to be running at full tilt the whole way, or nobody makes any money. So they just keep shoving them out the door. And it's kind of commodity. Now a couple of things. First, not all nanda is at it equals some are is getting faster, better, stronger than others. Um, So that is kind of adding some discrimination to your ability to pick a better company from. You know, it's no longer commodity. But the second thing is we are so quickly moving away from older storage devices like spinning disks, and certainly we don't put anything on metal tape anymore. Remember those big tape rooms where okay, yeah, that's gone, that's not a thing anymore. So because of that, I think we're gonna kind of flatten out and we're gonna have boom let cycles, not boom and bust cycles. Right So, because I do think we're just we have so much data that it has to go somewhere, and it's going on these nean devices which are now going into um uh, you know, enterprise storage areas. So that's thing. One thing too is you can discriminate across the makers of chips to high tech, which is like you're in video, right, because they're doing very very fast chips for graphics cards for gamers, but all serve for bitcoin mining and I say that with a smile, bitcoin mining and AI, so you know you're gonna pay a premium for those chips, so that it is probably not gonna go in a boom and bust cycle, unless well, they maybe make cyber uh uh currency you know illegal that might that might imbeed that, but um that's probably not your biggest worry anyhow, So right, so there are things that you can kind of try to avoid, but then again, I don't know. Sometimes things happen and the demand goes right back up, so you know, I like to have always some exposure. So that's kind of the Miss America answer, right, something for everybody. Kim. Can I ask you how you're thinking about supplying supply chain issues, because I've actually been reading some reports this week, maybe over the last two weeks or so, where more and more people are thinking that some of the supply chain problems are going to be dragging out for longer and longer potentially, And I know chips is a big, big part of this, But how are you thinking about the big picture. Sure, well, I'm going further and further out the timeline because I think there are going to be UM supply disruptions and a lot of it is because a lot of the actual especially CPU chips are being made in one central location, and that is Taiwan. And I strongly believe that UM, especially Taiwan Semiconductor, is just going to have to move some of its production around the world to reduce its risk, just for no other reason. And I believe other chip makers are going to kind of have to move around the world. So why is this something that we're discussing, Because I think it gives you opportunity. You can go a little further away from actually owning chips to maybe owning things like UM we own software that helps you to design chips, so you can do that. You could invest in the companies that make the machines that make the chips right, And I encourage people to think about that because I think demand is going up, but so is UM. You know, risk remediation. So they're gonna have to build these fabs away from off of Taiwan into other areas of the world, and that will drive a whole lot of spending that you can take advantage of because there's relatively few makers of the things that make chips. With all the sort of nationalism sweeping the world and even the supply chain issues we've seen, it seems like that is something yet that you must be preparing for in the futures. This this kind of you know, big electronic manufacturers bringing chips production in house, and and you know people trying to produce their own fabrication plants, make their own fabrication plants, like even in the US. That's that Is that a real? Is that really where the industry is going, do you think? Or is it just kind of being hype that way? I think it's being hyped that way. But I could see centers around the world, like in probably tax friendly and resource friendly areas, And Intel's chips are still made in the US, so I think that is always going to stay that way, right, but I can see it maybe moving over to I don't know, Ireland, because you know, they've been a friend of pharma, So why not be a friend of tech. They're they're just really good about allowing people to come in and they know how to handle that. So so I think that there could be these pockets around the world of technology. And you know, it's not perfect where you know, Belgium has its own you know, chip making plant, you know, and so does Luxembourg. I mean, I think that's getting kind of crazy, you know, too too small. But I do think having all of the uh computing of the world being made in one area is not the smartest thing. And let's take geopolitical out of it. They have earthquakes there. It's it's just not super smart, right, Yeah, Okay, let's get to all the all the various things I promised in the introduction here, which I I promise our listeners you will explain with great authority, which is, you know, we've had this this long, ferocious rally. Now, I mean we call it a seven month rally. It's it's you know, it's really longer than that eighteen month rally. Just those seven consecutive months, and now you know, we do sort of all. I've gained the confidence that the FED is you know, getting ready to start taping, tapering asset purchases. I wonder you know how important was that in your opinions to the rally? Uh? And does tapering matter given sort of you know, that reopening uh trend that's going on with all these people with you know, swollen savings accounts now to some degree or not, you know, maybe not fully ready to take those cruise ships, but at least ready to go out and eat and maybe you know, do something besides sit on zoom calls and watch Netflix all day? You know, is tapering a sort of a boogeyman that we don't have to worry about giving all those other forces in the real economy. I'm not usually a fan of, Oh, I don't know, collective government thought, right, Like, I'm an American, I'm you know, independent, I'm a hippie, I'm whatever you wanna, you know. But I think the Fed has done exactly the right thing in these last eighteen months. And we're gonna get to that answer about how it's affected the markets. Right. So the thing it did was bring rates down immediately back to that zero like sorry, quarter of basis point close enough to zero we call it zero interest rates, right, And then they did they understood from the two thousand and eight time frame that to really make sure that interest rates stay low, you have to do these bond purchases, so they've been doing that now. I think what Powell's theory is this, and this came through so clear to me, or maybe he was just talking. What I believe is you have to get people back to work, all of them that can. And that is his focus, not an on not on inflation, but on getting people back to work. And that is going to make it palatable to be weaned off of the bond purchases because I don't believe that interest rates will shoot back up, right, And I'm talking when I talk interest rates, I'm talking the tenure, So the ten uere isn't going to go like a two in a minute and a half after they start or start tapering. Right. But I think in stock prices, we always look at PE price over earnings. So right now we're at high PE right where we are paying more for that stream of cash flows. So we have to be willing to pay more for these companies. What we need to do is have the earnings grow so the PE follow falls, but the price doesn't fall. Does that make sense. I'm trying to do math on radio, so it's really tough. But you know, this is a division problem, and you don't want to make the price change all that much whenever you're raising interest rates. And I think Powell is trying to guarantee that companies will have more earnings if the economies back to more or less full speed. And that's why he's been judicious about not cutting these the bond purchases before this, because he's seen these uh. I don't think he's clear voiant. He's just been overly cautious and been paid back with all of the variant kind of noise in the system. Does that make sense? It makes sense, And I have I do have a follow up in UH in that I've read a couple of reports again reports, and I spent all my time reading reports and notes, but a few of them this week said that we're back in a bad news is good news environment. I know the ADP number disappointed this week, and that's exactly when I started seeing some of those notes. So I'm wondering if if that makes sense to you, if potentially we could be in another bad news is good news environment. Yeah, I mean everybody loves low interest rates. Everybody on Wall Street, let's put it that way, except for the banks themselves, love love low interest rates. And it's because it gives us the freedom to continue buying those cash flows at elevated ratios. Right So, we're paying what thirty seven times forward earnings for Microsoft right now, which is you know, huge, But if their earnings can continue to grow while interest rates fall, then their price shouldn't fall, you know, uh can Before we get to our Craziest Things segment, I also wanted to talk just briefly about UM, your sector neutral strategy, which I know is doing well this year, outperforming the SMP at least UM, which obviously is doing well this year. Talk to me about sort of what is the appeal of going sector neutral? I mean, my guess is that there are certain investors who want to be exposed to growth but don't want to be overloaded with tech. Maybe is that? Is that? It? In a nutshell, it is, and I mean I kind of when I came up with it, I was trying to do risk remediation. Because the strategy was made UM we started running it for another advisor and you know, doing it for their clients and Boca as a subadvisor, so they wanted more growth, but not like scary growth, and I said, sure, we can do this sector neutral thing which will force my hand is a portfolio manager to maintain, you know, alignment with the all of the sectors. Why is this important? A lot of people who are running money will say things like I hate energy, I'm not gonna have any energy. And then when energy does really well any year, they get their clock cleaned. Right, Well, who cares about the manage? Are the people who are holding those assets get their clock cleaned? And you know that's tough. What it really is a great little way to take a little bit of risk off the table. But what we're doing is this is where UM. The SNP five is the benchmark. The SNP five has a lot concentrated in those top five names, right, so we're going further down into the market cap, you know, lower market caps. And the great thing is some of the stocks I've picked have been scooped up by larger companies. And it's been great so far, right because you know, now I have to find another smaller company for healthcare because one of my UM stocks is getting taken out and it's a double in eighteen months. I'll take that all day. So that's kind of reinforcing. Now you have to be a good stock picker. You have to pick you know, good stocks and you know come a needs that other companies want to buy. I mean, that's not why I'm doing it. I just said, oh, this is somebody with an unusual product line and looks poised for growth. So you know, that gives you an opportunity to participate in that cycle of smaller companies being bought by larger companies, and so far it's working. It's it's a fascinating phenomenon that I feel like a lot of managers of either small caps are all caps type of funds. They never say they explicitly are looking for takeover targets, but that always ends up being sort of a big source of their their positive returns. I mean, I guess you drive yourself nuts just trying to look for targets exclusively. Well you can't. But what I've found is if you get quality, like everybody's looking for the same thing, I don't care if it's an investor or a company that wants to grow and they say, oh, we'll do We'll buy instead of build Okay, I mean that's what every company is doing if you can find that team of good managers that are made cut products that customers love. And this isn't just regular like retail customers. Corporate customers can love a product too, and if you're good at making that product, you are a candidate for takeover. And yeah, and it's a good it's a good gig. And at another good gig, Bildonna, I'm really struggling for the segway here, but uh, let's go with that. Another good gig is the crazy Things segment. Stand clear of the craziest things we saw in markets this week. That's a good gig for you, of Aldonna. So you start us off, what's the craziest thing you saw in markets this week? Well, before we get to what the craziest thing I saw was, I wanted to remind everybody that everybody can give us a call at six four six three to four zero, leave us a voicemail and we may even play it on the show. Another way to get your craziest thing on the show is to send me a Twitter message, which which somebody did earlier this week. And so I want to give doctor at Dr Einstein a shout out. I really hope I'm pronouncing that correctly. Of course, his real name, I'm sure it is. Doctor is his first name. Einstein is his second name. Uh, and I say Stein because there's there's a little underscore, a little dash between the one and the stein. So forgive me, but um, he and I have been exchanging messages on Twitter, and he and he, so he sent me something about some of the market. Mattes is that he's seen in the NFS n f T space once again. I know we we covered that last week, but he said there's an alternative, earlier version of the Ether Rocks contract that lets anyone meant a uniquely numbered rock for free. The crazy thing is that anyone can mint basically any uniquely numbered rock, and there's wild speculation on the value of those rocks, which don't even have a picture or n f T token. So these Ether rocks, I've been these hugely popular n f T s. They're supposed to be only a hundred of them. And so he was flagging to us that there's this code, there's there's something we're going on with the code where you can actually I suppose make new copies. I really hope I'm doing this do justice. But you can create more of them, and some of them don't even have a picture attached to them. And these things are like just like with everything else in the end of T space there there, everybody's going nuts over them. Basically. I think I feel like Kim hears all this and she just thinks in video and video and video. No, I'm thinking back to my youth and thinking pet rocks like that was the thing and you can't escape it, man, It just it mutates their time. Gosh, I think that was the idea behind ether rocks. It was the was it in the seventies and the eighties? It was rocks, right, So I think that's the inspiration. That's pretty good anyway. It's fun to cover cover this n f T stuff. There's just something. There's always something going on over there. But I want to give Dr Einstein a shout out. Thanks for sending that. Thank you, Dr Einstein. If that is in fact your real dame, All right, well what's your crazy thing? Now? You can't rely completely on Dr Einstein here, I can't, but I try to top his and mine is like really far out there. So I hope you like it. But it's uh, it's this story that I saw. It's about Flame and Hot mountain Dew. So PepsiCo owns Mountain Dew. They have this brand new flavor for Flame and Hot Cheetos flavored mountain Dew drinks. It was immediately sold out, and so I think on the internet there's speculation over, you know, when they're going to restock and when people can buy this sweet and sour mountain dew again. But it also made me think of this story that's been making its rounds sutainly. It's about the guy who claims he invented hot Cheetos either this one. Yeah, yeah. His name is Richard montagne Is. He even wrote a book about it, and there's I think some speculation over how much he was involved with the creation of hot Cheetos or something. Right, and he took it to the he was, yeah, that's that's the name of the book. It's it's called Flame and Hot, The incredible true story of one man's rise from janitor to top executive. Eva Longoria is making a movie about this, so be on the lookout for that. Anyway. That's my craziest thing. We have this public company involved Peptico owns as I said, Mountain the Mountain Dew brand, and I don't know. I don't know if i'd give it a try. I love hot Cheetos, but I don't know if i'd give the Mountain me neither. I don't know. Maybe I would probably try it, but uh, we'll see. We'll see how how big of a success that that one is. I have my doubts on that one, but maybe I can get my hands on it. We can next time we're in the office. Do you do that? You first? You first? If you if your face doesn't crinkle up, then maybe maybe I'll try it. But um, I'm gonna do mine really quick, just because I want to. I want to get kims into But um, you know, the Game Stop drama never ceases. I remember us. I think we joked uh last year even about well, if it stays at these levels, maybe they'll add it to the SMP five hundred. Uh, and everyone chuckled, ha ha ha, like it's ever gonna stay at these levels. Two's weren't that, But sure enough The Journal While Street Journal has a story out this week speculating on whether or not Game Stop could be added to the sp five hundred. It's way bigger than some of the smallest members of the index, but doesn't uh, it doesn't meet all the criteria including, uh, you know, having profits in the last quarter, and I think it has to have a sort of a net profit over the trailing four quarters. But we'll see. Stranger things have happened. I suppose then game stop joining the SMP and not. Leavan had a good argument, a good column arguing, well, you know, should the committee actually keep this out if it meets the qualifications just because everything everyone thinks it's crazy, And he suggests a weird SMP index to capture all these stocks and a normal SMP index. I I don't know. I think there might be something to that sector neutral and weirdness neutral. Kim, what do you think is that the next big thing? I I kind of like that. I would like a weird stock index. I think we I think somebody should put it together. How about us three, let's get together, because you know, if dal Jones can do it, we could do our own thing. Right. We could just have like, what are the weirdest stocks in? And they could be penny stock. Um. I remember years. I don't know if this will count is my weird thing. But years and years ago, UM, when I worked at the asset management firm before the one I started, UM, I had to be the girl that answer or the person that answered all the client's questions on should I invest in this? My brother in law told me about this, right, we all know that that kind of it was a great beat. I was so glad to get off of that. Okay, Anyhow, the weirdest one was a company. Now this was a penny stock truly, it traded like two cents or something like that. It was growing plankton and then getting carbon credits for releasing plankton into the ocean. Can I make this up? Now? I cannot, And I said, no, this is not a good idea. I don't know, like I don't know who would pay for it. I you know, there were no carbon markets at that time or and I didn't even know like they didn't explain how that the credits would work, like who was giving them credits and where they could be, so you know what I mean, there was a big missing thing. But I just think just growing plankton, I think that could end you up in the weird stockuments. I would I would give a high waiting to that one, I think for sure, regardless of the market. Yeah, big tanks, like in somebody's basement. I don't know where do you grow up, plankton, I think it has to be in a basement. Absolutely, that's where you gotta start. If not a garage, maybe, I don't know. Yes, no, No, that's that's too exposed. The plank didn't like it dark. Yeah, I don't know. It's too Silicon Valley. Yeah. Here in the Touching we have a major krill uh Harvester has a has a headquarters there. Krill is a big thing for the fish oil tablets. So but at least that's it's a better use case. I suppose that U or carbon credits for that's pretty good to Kim. I don't know if that was your official craziest thing, but I like that one. Thank you. And with that, I think, Philana, I think that's all the time we have. What do you think, Phil Dana? I allow you to anoint the winner of this week's craziest Thing? Can I pick myself or not? Absolutely? Not? No, yesterday, let me think about it. I'll consider it. I'll picked myself for approximately podcasts in a row, so I guess you can pick yourself. You did, but dr Einstein again. Uh he Actually he sent me a couple of different topics. All of them were in the end of T space and all of them were interesting. So maybe maybe we can Dr Einstein it is. Although I like to plankton, I gotta say I'm gonna do a planked plankton f t S. I think it's gonna be my thing. I want to work on that. Kim First, thanks so much for your time. Go take care of those chickens. Thank you. What Goes Up We'll be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever you get your podcasts. We'd of it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us, and you can find us on Twitter. Follow me at Reaganonymous. Bildonna high Rich is at Bildonna high Rich. You can also follow Bloomberg Podcasts at podcasts and Thank you to Charlie Pelldo, Bloomberg Radio and the voice of the New York City Subway System. What Goes Up is produced by Tofur Foreheads, head of Bloomberg podcasts is Francesco Levy, thanks for listening, See you next time.

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