A Strong First Half, But Not for Everyone
The first six months of the year have been terrific for the market averages, and the most recent quarter was very good. Yet a rising tide has not floated all ships. Not everyone is enjoying the same performance, and success once again comes down to owning the right stocks — having the right "rabbits," so to speak.
This unevenness plays out even within a single well-performing portfolio. It is possible to be long a number of names that are simultaneously making multi-year lows while the overall portfolio still delivers good performance. These are "dogs" — names that were liked and bought, but that have not worked out. That contradiction — strong aggregate results sitting alongside individual losers — actually proves two important truths about investing.
First, nobody is going to be right all the time. Second, and just as importantly, you don't need to be right all the time. What matters is having a few genuinely good names in the portfolio. Even with a couple of clunkers dragging along, it is the overall performance that counts, not the fate of any individual position. If you finish the quarter up and finish the first six months up — despite carrying some bad names — you have had a good first half of the year.
The Reversal of Last Year's Favorites
The broader market illustrates how leadership can shift. Several of the hyperscalers that were investor favorites, such as Meta and Microsoft, are actually in negative territory for the year — even though these were the crowd's darlings and the objects of the "fear of missing out" trade. Gold and the metals, which were incredible performers the prior year, drew in chasers who then got caught as those assets began underperforming.
This raises the central question for value investors: Are some of 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.
A List of Out-of-Favor Names
Several previously praised names are now all making new lows: ICE (Intercontinental Exchange), Adobe, and EssilorLuxottica (Essilor). These are all positions held by both the manager and clients — names that are currently a struggle. But for the value investor, that struggle is precisely where real opportunity may lie.
The counterargument is well known: some people warn against trying 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 is out of favor. For a value investor, the answer is yes, these represent opportunity. For a momentum investor, it is a completely different story.
ICE and the Exchange Stocks
Should an investor add to a name like ICE now that it sits at 52-week lows, or simply hold on? ICE is a very large holding, originally acquired because stock exchange memberships were converted into shares of the public company. Six months ago, ICE was trading at roughly 35 times earnings; it now trades at about 15 times earnings, while the fundamentals remain very much intact.
There is a reason ICE is weak — as are all the exchange stocks — but the selloff appears way overdone, because these remain fundamentally good companies. Accordingly, the position was actively bought on the last day of the quarter: purchased for clients who did not own it, and added to for those who already did.
EssilorLuxottica
This name had been called correctly on the way up — tied to the medical and eyewear story, the Ray-Ban product, and the partnership deal with Meta — and it reached a new high of 186 last November. But it was held through the decline and now trades around 97, prompting clients to ask what happened to the great pick.
The stock has essentially been cut in half, yet the company remains the "800-pound gorilla" of the eyewear sector. With the Meta partnership, it still has a great product. Growth may have slowed a little, but there is fundamentally nothing wrong with the company. This is another stock that was added to on the last day of the quarter.
Adobe and Zoetis
Adobe was likewise added to during the same buying, as was Zoetis, which operates in animal health care. All of these purchases follow the same logic: quality companies, temporarily out of favor, bought at depressed prices.
The Fed and the Real Risk of Higher Rates
On the macro picture, the incoming Fed leadership (Kevin Warsh, referenced as speaking at the ECB's central banking forum) is playing it very close to the vest and not offering forward guidance, potentially charting a new course to make better decisions.
What should investors hope to hear from the new Fed chair, and what should they expect for Fed policy? Fed policy will ultimately be whatever it needs to be — a knee-jerk reaction to what is happening in the economy and, to a large degree, in the world.
The more important insight concerns market risk. Investors should forget about interest rates going lower. The real issue is inflation. The genuine risk — one that does not appear to be factored into the market — is that interest rates remain where they are, or even move higher. That outcome would be a negative for the market and represents a real risk going forward. Because central bankers are not clear in their messaging, investors will have to listen very carefully to the new Fed chair, read between the lines, and be a little creative in interpreting what is said.
Trades That Are Working: Airlines
Not every pick has been a laggard; several have been on a real tear, particularly the airlines. The airline trade — being long carriers such as United (UAL) and American (AAL) — remains very much intact, and the outlook is for the stocks to move higher.
The premise behind the trade is unchanged: lower energy prices. While the future direction of energy prices is genuinely unknown — the honest answer to where oil goes from around $69 is "I have no idea," though the guess leans lower — the logic holds regardless. Energy is the airlines' single biggest cost item, so lower energy prices are a big positive for the group. This makes it a natural trade, one that has been discussed for six or seven months, possibly longer. On balance, people hate the airlines, and with good reason, because it is a terrible business — but it still makes for a very good trade.
Other Favored Positions
Sunbelt Rentals
Sunbelt Rentals is viewed as a sleeper. It is more or less a mirror image of United Rentals (URI) — a great business that rents out equipment across many markets. It is considered a really interesting company and a name worth buying for the future.
Insurance — Chubb
The insurance sector, and Chubb in particular, remains a long-standing favorite; the conviction in Chubb continues.
MLPs and Pipelines
Master Limited Partnerships — the pipeline companies — serve an essential function: energy has to be moved from one place to another and stored. These are big dividend payers. While not as exciting as a name like Micron (MU) or Nvidia, they have done quite well this year, delivering both large dividends and capital gains. That combination is expected to continue going forward. Specific names in this group include Enterprise Products and Energy Transfer (ET).
The Takeaway
The through-line across all of these views is a disciplined value orientation in a market dominated by momentum. Quality businesses that have fallen out of favor — exchanges, eyewear, software, animal health — offer opportunity to those willing to buy weakness, provided they accept that not every pick will work. At the same time, the overlooked macro danger is not lower rates but stubborn inflation and the possibility of rates holding or rising. Balancing beaten-down value names against trades that are actively working — airlines, equipment rentals, insurance, and income-producing pipelines — reflects the core principle that overall portfolio performance, not the outcome of any single position, is what ultimately counts.
