A Strong First Half, But an Uneven One
The market averages have been terrific through the first half of the year, and the quarter just closed was very good. Yet a rising tide has not floated all ships — not everyone is enjoying the same performance. Success continues to come down to owning the right stocks, or as I like to put it, having the right rabbits.
Looking across a portfolio of familiar names, the picture is genuinely interesting: many of our holdings did okay for the first six months — not matching the averages, but respectable — while at the same time the portfolio also contains a lot of dogs. There are names we've liked that are making multi-year lows even as the overall portfolios post pretty good performance. That contrast proves two things. First, and obviously, nobody is going to be right all the time. Second, and more importantly, you don't need to be right all the time. What you need is a few really good names in your portfolio. Even if you're saddled with a couple of clunkers, it is overall performance that counts, not what any individual name happens to do. If you're up for the quarter and up for the first six months in spite of the bad names, you've had a good first half of the year.
This point is worth underscoring against the backdrop of this year's supposed favorites. Some of the hyperscalers that everyone loved — Meta, Microsoft — are actually in negative territory for the year. Those were the names that fed the FOMO trade. Others chased gold and the metals, which were so incredible last year, only to get caught as those trades began to underperform.
Are the Losers Going to Become the Winners?
That is the $64 question. We live in a world where momentum seems to be driving the train, which is frustrating for the value investor who wants to buy stocks that are out of favor. I have a list of names we've spoken about positively that are all making new lows: ICE, Adobe, and EssilorLuxottica — all names we own and that our clients own, and all names we're struggling with.
For the value investor, there is probably real opportunity here. The obvious counterargument is that you don't want to try to catch a falling knife, because it can hurt. But these are all good companies that are clearly out of favor — and there is always a reason a stock falls out of favor; there's always a reason. So the calculus splits by investor type: for a value investor, yes, these are opportunities; for a momentum investor, it's another whole story.
ICE (Intercontinental Exchange)
I have talked before about liking the exchanges, including the CME, and those names had moved up to hit records — we saw records as recently as last August. Now they're at 52-week lows. ICE in particular is a very big holding for us, because we ended up with the stock when stock exchange memberships became a public company.
Six months ago ICE was probably trading at about 35 times earnings. It's now trading at roughly 15 times earnings, while the fundamentals remain very much intact. There's a reason ICE is weak — as are all the exchange stocks — but I think the selloff is way overdone, because fundamentally I still think these are good companies. So yes, we were buyers of ICE on the last day of the quarter. We bought it for people who didn't own it, and for those who did own it, we added to their positions.
EssilorLuxottica
This is the same story. I originally liked the name for its eyewear franchise and its partnership with Meta on the Ray-Ban smart glasses, and it moved to a new high of 186 last November. But we held on, and it's now at 97 — cut basically in half — prompting customers to yell at me and ask what happened to that great pick.
Even so, EssilorLuxottica is still the 800-pound gorilla in the eyewear sector, and with the Meta partnership it still has a great product. It's out of favor, and it's a case where growth might have slowed up a little, but fundamentally there is nothing wrong with the company. So this is another stock we added to on the last day of the quarter.
Adobe and Zoetis
We similarly added to Adobe. We also added to Zoetis, which is in animal health care. These fit the same pattern — quality companies whose share prices have fallen back to attractive levels.
The Big-Picture Risk: The Fed and Inflation
On the macro front, the key question is what to hope for and expect from Fed policy under a new Fed chair. The takeaway from recent central-banking commentary is that the leadership is playing it very close to the vest — not giving forward guidance, and signaling it may chart a somewhat new course to make better decisions.
My view is that Fed policy will be what it will be, because it amounts to a knee-jerk reaction to what's happening in the economy and, to a large degree, in the world. The real risk for the market — and the challenge for the Fed — is this: forget about interest rates going lower. The real issue is inflation. The genuine questions are whether rates remain where they are, or the possibility that they actually go higher. I don't think a rate increase is factored into the market, and it would be a negative for stocks. That's a real risk going forward.
Because the Fed's messaging is not very clear, we'll have to listen very carefully to what the new chair says and read between the lines. You have to be a little creative in interpreting it.
Names That Have Been Working
Alongside the beaten-down value plays, several picks have been on a real tear — and the theses behind them remain intact.
Airlines (UAL and AAL)
The airline trade is still very much intact, and I think the stocks go higher. I don't know where energy is going, but the premise for the trade remains the same: lower energy prices. Asked where oil goes from around $69, my honest answer is I have no idea — I'm guessing lower, but I can't call it. What I do know is that lower energy prices are a big positive for the airlines, because the cost of energy is their single biggest cost item. That makes it a natural trade, one we've been talking about for six or seven months, maybe longer. On balance, people hate the airlines — with good reason, because it's a terrible business — but I still think it's a very good trade.
Sunbelt Rentals
Sunbelt is a sleeper. It's more or less a mirror image of United Rentals (URI) — a great business that rents equipment all over. I think it's a really interesting company and a name I would buy for the future.
MLPs (Enterprise Products and Energy Transfer / ET)
The logic on the master limited partnerships is straightforward: you've got to move the energy. The product has to be moved from one place to another and it has to be stored — that's the pipeline business. These are big dividend payers, and they've actually done quite well this year. They're not as exciting as a Micron (MU) or an Nvidia, but they've delivered both big dividends and capital gains, and I think that continues going forward. Among the names here are Enterprise Products and Energy Transfer (ET).
Insurance — Chubb
On the insurance side, Chubb remains a favorite, and I'm still on the Chubb bandwagon.
The Takeaway
The through-line across all of this is a value discipline exercised in a momentum-driven market. Quality companies whose fundamentals remain intact — ICE, EssilorLuxottica, Adobe, Zoetis — have sold off for identifiable reasons but appear overdone, offering opportunity to patient investors willing to add on weakness. Meanwhile, thesis-driven trades like the airlines (on lower energy costs), equipment rentals, MLPs, and insurance continue to perform. Underlying it all is the macro caution that the market's biggest unpriced risk is not lower rates but sticky inflation and the possibility that interest rates hold or move higher.
