Over the past couple of years, FANG stocks — Facebook (FB), Amazon.com (AMZN), Netflix (NFLX) and Google (GOOGL) (now Alphabet) — were portfolio managers’ go-to names for so-called “rental longs.”
“Rental longs” is an industry term to for stocks that receive short-term, fast-money buying when portfolio managers need to add long exposure.
This year, the FANG stocks continue to do very well. FB is up a whopping 16.6% year-to-date, while Amazon is up 10.4%. Netflix is the biggest winner, surging 17% while GOOGL is up a relatively paltry (yet still very good) 5.4%.
This year, however, one well-known Wall Street analyst is advising that you ditch the FANGs in favor of CRAP.
Now, CRAP here does not mean low-quality stocks. Instead, CRAP is one of Wall Street’s newest, and potentially most chic, acronyms.
CRAP stands for Computers, Resources, American banks and Phone carriers.
The term, as well as the “buy CRAP” thesis, is one championed by Tom Lee, founder of Fundstrat Global Advisors.
In a note to clients offering his 2017 stock-market outlook, Lee provoked interest by advising investors to take the “CRAP”-py plunge.
“Buy CRAP — Computers, Resources, American banks and Phone carriers — all levered to investment recovery, inflation and deregulation.”
Lee was one of the few market analysts to correctly peg the bull market of 2016. So his words deserve a little extra attention in my view.
At the end of 2015, Lee said the S&P 500 would end 2016 at 2,325. Lee turned out to be about 87 points higher than the actual close on Dec. 30, 2016, of 2,238.83.
Still, that bullish call was one of the most-optimistic — and nearest to reality — calls of the year.
Now, Lee is telling investors that this market will run into some strong headwinds, and finish the year with only a very small gain.
In fact, Lee has one of the lowest price targets for the S&P 500 among most of the big-name investment strategists. He is calling for a 2017 close of just 2,275.
Here’s how Yahoo! Finance reported what Lee had to say about what would likely happen in 2017:
“Drawdowns of 5%-7% in 1st year of a New President, usually within first 90 days. Catalyst for drawdown? Policy risk and/or inflation confusion in bond market.”
Now, it’s safe to say Lee doesn’t have this market right, at least through the first six weeks of the year.
Rather than a drawdown, there’s been a melt-up. The S&P 500 has surged to all-time highs, post a 3.45% year-to-date gain in the process.
Lee’s thinking on the catalyst for a drawdown is however, in my view, quite sound.
Right now, the major risk for equities is policy failure. That means if President Trump and the Republicans in Congress fail to execute on their pro-growth, anti-regulation, low-tax agenda, then this market will sell-off … and sell-off hard.
So far, Wall Street has given President Trump and the Republicans some leeway, as it’s only a few weeks into the new administration. Yet if a few months goes by and it doesn’t look like there will be an Obamacare repeal-and-replace or, perhaps more urgently, corporate tax reform, then Wall Street will get bored with the situation fast and punish equities.
If this punishment does get meted out, then even CRAP stocks aren’t likely to save you.
Still, if we do see the economic recovery take shape … and if we do see inflation spurred on by that recovery, as well as a deregulated banking system … then sectors such as computers, resources, American banks and phone carriers are likely to see a lot of money flows.
So, how has the CRAP thesis played out so far?
Year-to-date, the Philadelphia Semiconductor Index, or SOX, a proxy for computers, is up 6.2%. The FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR), an ETF pegged to the natural resources sector, is up 6.1% in 2017.
In terms of American banks, we have the SPDR KBW Regional Banking ETF (KRE), which is up only 1.1% year-to-date. Then there are the phone carriers, as represented by the Vanguard Telecommunication Services ETF (VOX), which is down 1.7% year-to-date.
Yes, there’s still a lot of time to see whether CRAP stocks should replace FANG stocks in 2017.
So far, however, there’s no evidence indicating investors should loosen their FANGs and embrace the CRAP.
From where I sit, no matter what the year is or who is in charge politically, it still makes good sense to target companies with good cash flow, strong management teams and strong product pipelines. And if they pay a dividend, even better.
But perhaps this year more than ever, it’s also extremely important to identify the potential losers as well. And to either avoid them or keep some cash handy to short them or buy put options on them to profit on the downside.
It is my personal mission to find both types of opportunities, and to show you how to use them to not only help you ride out what this market has in store for us … but also to help you enjoy that ride.
Good luck and happy investing,
Uncommon Wisdom Daily