Stocks most focused on their company's 'nuts and bolts'
Earnings season has almost come and gone for the past quarter and whether the Fed's higher for longer interest rates have filtered through the markets has been a topic of many discussions.
Ellen Hazen, F.L. Putnam Investment Management Co. Chief Market Strategist and Portfolio Manager, joins Yahoo Finance Live to discuss consistent stock performers following a majority underwhelming earnings season for tech giants like the Magnificent Seven stocks.
"We're looking at very steady, high cash flow, high return on invested capital compounders," Hazen says, listing companies like Paychex (PAYX) and waste management provider Republic Services (RSG), later adding: "So some of these 'steady-eddy' companies have continued to churn along in the background and are not subject to that same multiple compression that you see from the long-duration assets."
Click here to watch the full interview on the Yahoo Finance YouTube page page or you can watch this full episode of Yahoo Finance Live here.
Video Transcript
- Where is some of the slippage or the outflow do you believe kind of initiated?
ELLEN HAZEN: Well, one of the things that we're looking at, as well as a lot of other market participants, is the performance of those AI stocks. And particularly, the so-called Magnificent Seven. And as we look at those, they had outperformed massively through most of the first half of the year.
But in September, October, they've underperformed the overall market. So even though they remain very strong on a year to date basis, you're seeing some of the air come out of that. A lot of those are very long duration stocks as rates have come up over the last several months. You have seen that reflected in the valuations compressing a little bit for those stocks. So we can see a churn away from some of those AI plays toward areas that have underperformed so far, year to date, particularly some stable areas, Steady Eddie, boring companies that have not participated as much as those AI stocks.
- So Ellen, when we talk about some of the other areas of opportunity within the market here outside of AI, outside of some of the recent outperformance that we've seen, what are some of the names or some of the sectors that then you like at this point?
ELLEN HAZEN: Well, we're looking at very steady, high cash flow, high return on invested capital compounders. So what does that mean? One example is a company like Paychex. They do payroll processing and other functions for small to medium-sized businesses. Very sensitive to payrolls. And as we have seen, jobs have remained very strong all year.
That's a company with amazing return on invested capital. Over 40% return on invested capital. And you can get it for not too much more than 20 times earnings. So that's a stock that we really like. We think it's going to do well outside of a recession and almost any market environment that's going to do well.
Another really Steady Eddie company, kind of boring, but again, good return on invested capital is Republic Services. Waste management company. Duopoly business for the most part. Very steady. You get a 1 or 2 points of volume. You get 2 to 4 points of price. Grows through almost any market environment. And again, you can get that for just over 20 times earnings. So some of these Steady Eddie companies have just continued to churn along in the background and are not subject to that same multiple compression that you see from the long duration assets.
- Is there any kind of common denominator in what you're hearing from CEOs of the Steady Eddie companies, as you've defined them, that kind of gives you an inclination to be a little bit more either bullish about them or just what their prospects are in the industries that they operate?
ELLEN HAZEN: Well for the most part, they're keeping an eye on the overall economy, and they're looking at rates, of course. But they're really focusing on the nuts and bolts of their business. So they want jobs to continue strong, for sure. And they're looking at overall indicators. But they're not so focused on what the pundits are saying. Instead, they're looking at their overall business and how they can grow, how they can continue to provide both volume and pricing growth going forward. So I would say that they're focused on the nuts and bolts rather than looking at the overall economic picture.
