Another long-short manager perhaps more concerned than Greenblatt about valuations is Ali Motamed, co-founder of Invenomic Capital Management. “The next five years will have a lot of bumps,” he predicts.

Some optimistic followers of the Shiller CAPE (cyclically adjusted price-earnings) ratio take solace in the knowledge that, come 2021, the 10-year look-back period will no longer include the 2008-2010 period that saw wild swings in both equity prices and earnings. Motamed isn’t one of them.

“Take out those numbers and the Shiller CAPE ratio will drop about 6%,” he says. “It will go from being the second most expensive market in history to the third most expensive.”

Low interest rates are one of several reasons stock prices remain elevated, and Motamed doesn’t expect that to last very long. If history is any guide, the market will break at some point in the next five years and there will be a correction of more than 20%. The fact that it hasn’t happened in eight years since the Great Recession makes it more, not less, likely.

“There will be a great opportunity,” Motamed says. He expects many investors accustomed to the low volatility of the current bull market to panic and overreact.

Right now, “they are just chasing what has worked since 2013,” he continues. That is mostly momentum stocks.
At that juncture, what will work “won’t be what has been working since 2013.” He predicts that valuations will start to become a lot more important.

Some defensive sectors like health care could hold up initially. Many of these companies have enjoyed a boost from Obamacare moving millions of Americans to the insurance rolls.

However, even if “Obamacare doesn’t go away,” the growth that the sector has experienced will moderate, Motamed says. He cites several medical device companies that were selling at 10 times EBITDA in 2012 and are now selling at 17 or 18 times EBITDA five years after the secular growth spurt from Obamacare has finally run its course. Many of these companies have some “good things going for them,” but the market discovered the tailwinds at their backs years ago.

Finding instances of mispriced securities after an eight-year bull market is easy. Motamed sees it all over the place. “Many names trade at extremes. That’s why it’s an interesting market,” he says.

Another imbalance he discerns is in the semiconductor sector. The current market darling, Nvidia, is beloved because many think it can penetrate some of market dominator Intel’s key markets. It may be able to do that. However, Intel is earning cash flow that is three times the revenue Nvidia generates, he notes.

Wreckage across the retail landscape is also spawning opportunities. Today, the conventional wisdom is that Amazon will put the vast majority of retailers out of business. It wasn’t so long ago that Walmart was the retail terminator.

“Amazon won’t kill all of them,” Motamed says. “Some companies are learning to deal with it.” It’s not very hard to find solid retailers these days priced at distress levels like two times EBITDA.

Accounting issues also are likely to come to the forefront in the next few years. Changes in retailing will have consequences, however, as lease consolidation accounting issues will hit retailers and their landlords alike. In information and technology, the accounting questions are likely to revolve around revenue recognition. As energy and biotech performance proved in 2015 and 2016, short sellers don’t need a full-fledged recession for opportunities to present themselves.

Jim Paulsen, chief investment strategist at the Leuthold Group, believes that the next recession is at least two years away.

The leading cause of recessions, in his view, is overconfidence. “People start doing stupid things,” he says.

Pundits have talked about low equity market volatility for most of the year but few have noticed the remarkable stability of inflation and interest rates. He is watching wage inflation closely to see if it moves above 3% for a sustained period.

Paulsen thinks it could happen next year, and that could prove interesting on many fronts. It’s not clear if the Fed would overreact, as it often does.

Among the sectors Paulsen favors when it’s late in an economic expansion are energy, materials, technology and capital growth.

“Commodities and real estate are likely to do better than other financial assets the rest of the way,” he says.

First « 1 2 3 » Next