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Empirical Research Partners will be pursuing “a tad less offense” in terms of its portfolio strategy for March, in an equity market in which it sees few “glaring opportunities.”
The broker-dealer and investment adviser said that it was “prone to trim” holdings of semiconductor and semiconductor equipment maker stocks.
“Our strategy has involved balancing GARP(y) stocks, that generate lots of free cash flow, many of them drawn from the tech sector, with an array of low-multiple cyclicals, including homebuilders, banks, rails, some metals and energy issues,” Michael Goldstein, Empirical Research’s managing partner, said in a note on Friday. GARP refers to “growth at a reasonable price” stocks.
“Semis and semi equipment stocks, that’ve been a long-standing theme in our work, are now selling as a +50% P/E premium to the market, back to where they were in late-2018 and we’re prone to trim them a bit,” Goldstein added.
According to a portfolio built by the research firm using its core model, the recommended weight for semiconductors – Nvidia (NVDA), Broadcom (AVGO), Qualcomm (QCOM) – is at 7.5%, compared to a current weight of 10.3% in the S&P 500 (SP500).
“(The portfolio is) quite different from its predecessors in that it no longer outweights the tech sector, including the semis. It’s betting on homebuilders and banks, and is otherwise broadly diversified,” Empirical Research said.
One of the primary drivers of Wall Street’s current bull run has been an advance in semiconductor and semiconductor equipment maker stocks along with artificial intelligence-related stocks.
Bespoke Investment Group noted that on Thursday, the Philadelphia Semiconductor Index (SOX) traded at a higher price than the benchmark S&P 500 (SP500) index for the first time ever.
Empirical Research also believes that a combination of disinflationary hopes and the strong fourth quarter 2023 earnings season has resulted in a lack of “glaring opportunities” for investors.
“The price being paid for top-line growth is back to where it was at the end of 2019, even though long rates are twice what they were back then. Big free cash flow generators no longer look unusually cheap,” Empirical Research’s Michael Goldstein said.
“Given the optimism, the beleaguered consumer staples and utilities sectors are selling at unusual discounts to the market and their relative nine-month price momentum statistics are near 70-year lows,” Goldstein added.
