By Lisa Kailai Han, Insider
Stocks may have briefly rebounded last week after sliding into bear market territory earlier this month, but Nancy Tengler says it’s not yet the light at the end of the tunnel for investors.
But Tengler — who serves as the CEO and chief investment officer of Laffer Tengler Investments — isn’t particularly worried about a potential economic downturn.
“What we have to recognize is that we’re starting from a much stronger economy than we have in many other difficult periods,” Tengler told Insider in an exclusive interview, pointing to a strong labor market, flush consumer savings, and unfolding markdowns in goods and services that should help compress seething inflation numbers. “The Fed has been so far behind the curve for so long that the market took things into its own hands and drove up rates and sold off stocks as though we were in a recession .”
Despite her positive long-term outlook, Tengler forecasts an especially choppy summer for stocks. Still, she urged investors to not let market fears factor into their investing strategies, instead emphasizing the current opportunity to take on more risks while stocks are still downtrodden.
“The bears are rarely in charge, so they hate to let go. They smell blood and they just continue,” Tengler said. “But if you’re a long-term investor, volatility is your friend, and these periods can prove to be really, really good entry points. It kind of feels like a once-in-a-generation entry point to me.”
A delicate balance is required for gains
In terms of positioning, Tengler maintains both a defensive and risk-on tilt in her portfolios — a delicate balancing act that requires knowing exactly when to add risk in order to pull off successfully.
“If you move your portfolio too defensively, the risk is that coming out the other side, you’re going to lag pretty dramatically,” she explained. “What we’ve been able to do historically is provide protection in a declining market — which is not to say we don’t go down, but we go down less — and then to keep up or even accelerate faster than the market coming out the other side.”
This strategy is accomplished by opportunistically buying companies that have the strong pricing power and earnings growth to justify their higher valuations.
“When growth is slowing, you want to own names that have reliable earnings growth,” Tengler said. She cited Public Storage (PSA) as a good buy due to both the company’s consistent business model and its digitization efforts, which should help improve margins tremendously. “That’s a defensive business that will continue to grow — maybe not dramatically — but they’ll grind away in a recessionary or high inflation environment.”
Tengler is also bullish on dividend growers and emphasized stock selectivity, urging investors to focus on a company’s bottom line. Based on fundamental metrics, she recently redeployed her portfolio’s exposure to Starbucks into McDonald’s (MCD) and Chipotle (CMG) instead. Likewise, she recently trimmed back her exposure to Honeywell, rotating instead into defense companies Raytheon (RTX) and L3Harris (LHX).
Tengler also recently reduced her exposure to Disney based on the company’s management, instead replacing it with Spotify (SPOT), a name she considers to be on the riskier end of companies with reliable earnings growth.
“We added it because we think it’s in the growth space and somewhat defensive. It’s not like Netflix , where you have to be sitting in your home — you can be listening to Spotify out,” she explained. “They’ve had very little turnover or churn, and the podcast business is improving.”
Focus on these 5 sectors
On a sector basis, Tengler is currently overweight names in energy, commodities, healthcare, materials and technology.
Even though a high-stakes geopolitical crisis has already catapulted energy prices, Tengler believes the sector still has the potential for at least one more strong rally. She advised investors to shift their focus away from the upstream companies that are more closely tied to oil prices like Diamondback, EOG Resources, and Pioneer, instead emphasizing an increased exposure to downstream, integrated oil companies like Chevron (CVX).
Tengler is bullish on healthcare because of the sector’s relative resistance to economic slowdowns, and because insurance providers like Chubb (CB) are poised to benefit from rising interest rates.
Selectivity matters even more for the technology sector , according to Tengler, who noted that the sector has suffered due to rising interest rates discounting companies’ future earnings flows. She suggested investors emphasize companies with solid balance sheets and earnings growth momentum rather than once-overvalued “high flyers” like DocuSign and Peloton.
For Tengler, this means that she’s especially focused on cloud names like ServiceNow (NOW), Microsoft (MSFT), Amazon (AMZN), Adobe (ADBE), Salesforce (CRM), and Oracle (ORCL).
“The secular narrative and trends behind cloud are enormous, and we know that the total addressable market for cloud is in the trillions of dollars,” she explained. Likewise, Tengler also likes cybersecurity names for their high growth potential, listing Palo Alto Networks (PANW) as one of her favorite buys.
While cloud and cybersecurity firms have posted positive growth and earnings, Tengler believes that their stocks are currently trading cheaply because they were caught up in the broader tech selloff. Many of these companies have also focused on growing dividends, which Tengler said was an excellent way for investors to add risk into their portfolios.
“This article is provided for illustrative purposes only and is not necessarily indicative of any future investments by Laffer Tengler Investments or the results of any future investments. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. No representations or warranties whatsoever are made by Laffer Tengler Investments or any other person or entity to the future profitability of a portfolio or strategy or the results of making an investment. Do not use this article as the sole basis for investment decisions or rely only on performance when selecting an asset class or investment product. Investing involves risk, including the possible loss of principal. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon. Always consult a financial, tax, and/or legal professional for your specific situation. Past performance is not indicative of future results.”