When I hear "Davos Man," I expect to see a chiselled superhero swooping down to the rescue within nanoseconds of intergalactic calamity.
Not even close. Coined by political scientist Samuel P. Huntington, the term Davos Man was originally meant to identify attendees of the World Economic Forum in Davos, Switzerland, but the term has evolved to represent unscrupulous bankers and Wall Street bigwigs – hardly the embodiments of a superhero.
When used in the context of finance, the term represents a hypothetical investor who typically gravitates toward global businesses and bonds and is swayed by central bank policy. According to Michael Hartnett, chief investment strategist for Bank of America Merrill Lynch, Davos Man has been ruling the roost for the past decade or so, but may have found his nemesis in "Joe Six Pack," another concocted investor but one that is more domestically focused and Main Street-oriented – and has gained momentum in the Trump policy landscape.
These two characters serve as backdrop to the Great Rotation theory, the idea that the financial assets that thrived during the last 10 years of slow growth, low interest rates and non-existent inflation are now being eclipsed by those that had been languishing – more mainstream assets such as commodities and banks. As the theory goes, the grey-haired descent of interest rates and resulting rise in bond prices has reached an inflection point where rates will start to push up and bond prices will suffer, resulting in an exodus from bonds into stocks.
There is no shortage of opinion on either side of the Great Rotation fence. A recent Bloomberg article quotes Jeffrey Kleintop, chief global strategist for Charles Schwab Corp., as saying that the movement of money out of bonds and into the stock market over the past few months marks an important turnaround. "Generally, when we see these turns," he argues, "they tend to last for a couple of years – they tend not to be very short-term in duration." He predicts that higher interest rates and potential losses in the bond market "could mean a continued rotation into stocks by individual investors."
On the flip side, according to a Bloomberg article last month, Goldman Sachs chief equity strategist David Kostin doesn't think the shift will stand the test of time, and Citigroup Inc. "says there's no such thing as the great rotation."
That said, the fiscal stimulus promised by the Trump administration, which is expected to fuel inflation, could further reduce the appeal of bonds, while the new president's push for deregulation and corporate tax reform continues to bolster stocks to new highs.
According to Mr. Hartnett, the rotation is resulting in a shift from: Secular stagnation to cyclical recovery; deflation to inflation; central bank stimulus to fiscal stimulus; globalization to isolationism. For investors, he says, this could mean opportunities in commodities, small-caps, and bank stocks.
Using my guru-based stock screening models, I have identified the following six Joe Six Pack-friendly stocks:
Home Bancshares Inc. (HOMB) is engaged in providing a range of commercial and retail banking and related financial services. The company scores highly under our Peter Lynch-based stock screening model due to the satisfactory relationship between the company's price-to-earnings ratio and the growth in earnings-per-share (PEG ratio), which indicates fairness of price. With a PEG of 0.90, HOMB passes this test.
Universal Forest Products Inc. (UFPI), through its subsidiaries, supplies wood, wood composite and other products to the retail, construction and industrial markets. The company earns a perfect score under our James O'Shaughnessy-inspired stock screening model due to its persistent growth in earnings-per-share and the price-to-sales ratio of 0.71 (based on trailing 12-month sales).
Tyson Foods Inc. (TSN) sells chicken, beef, pork and prepared foods under Tyson, Jimmy Dean, Hillshire Farm, Sara Lee and Ball Park brands. The company earns high marks from our Lynch-based strategy given its PEG ratio of 0.55, and its average growth in earnings-per-share (three-, four- and five-year averages) falls comfortably within the preferred range for this screen of between 20 per cent and 50 per cent (23.6 per cent).
Owens Corning (OC) is engaged in the business of composite and building materials systems, and earns a strong score based on our Lynch strategy due to its PEG ratio of 0.90 and earnings-per-share of $3.41 (U.S.). Debt represents about half of equity, which passes this screen.
Trinity Industries Inc. (TRN) is a diversified industrial company that owns a range of businesses providing products and services to the energy, transportation, chemical and construction sectors. The company is favoured by our Joesph Piotroski investment methodology based on its positive operating cash flow ($939.70-million) which exceeds net income for the current fiscal year ($776.22-million), a requirement under this model.
Amtrust Financial Services Inc. (AFSI) is an insurance holding company that provides specialty property and casualty insurance. The company gets a thumbs up from our Warren Buffett-based stock screening model due to its earnings predictability and average return-on-equity over the past 10 years of 18.3 per cent (versus the minimum requirement of 15 per cent).
Validea holds positions in all these stocks except Owens Corning.
John Reese is CEO of Validea.com and Validea Capital, and portfolio manager for the National Bank Consensus funds. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service.