Growing up, Nancy Tengler wanted to become a fighter pilot in the Navy. But instead, she ended up taking her competitive spirit to the next best thing: investing.
“I knew I was in Nirvana because you get a report card every day,” said Tengler, chief investment officer of the $750 million Laffer Tengler Investments. “You are always learning and always improving, so for me, that was the best.”
Tengler is handing out an impressive report card these days. She runs a highly concentrated 12-stock portfolio that has returned 16.2% net of fees at the end of September, compared to the S&P 500, which has climbed 10.6% over the same period.
No politics in Tengler’s portfolios
With the US presidential election less than three weeks away, Tengler is advising her clients to remain long stocks while trying to hedge against inevitable drawdowns with options.
She is bullish about the stock market which she believes will rise regardless of the election outcome.
“Despite the prospect of a blue wave, a divided government, a Trump victory, a Biden victory, stocks have entered a new bull market,” she said. “I believe that is driven by liquidity but also by technology and the improvements in productivity that technology generates, a resurgence in US manufacturing jobs as well as just job growth.”
These long-term economic trends will sustain no matter who wins, according to Tengler.
But for investors who are hyper-focused on the elections, she does have an observation that may calm their minds.
“Since 1984, 100% of the time the market has predicted the winner. If it’s down from July 31 to October 31, that goes to the challenger, if it’s up it goes to the incumbent,” she said. “Today we’re up 8.5% during that period, so we would need a pretty big sell-off for us to end down for the period.”
However, with the unprecedented global pandemic and lockdown, 2020 might just be the year when the election outcome predictor fails to work due to “all the liquidity and delayed implications of the pandemic.”
“It may just be that sophisticated investors are buying and they’re going to dump if we do get a blue wave because some of the policies are not going to be good for companies,” she said. “But I still don’t think that takes the bull market off the table.”
High-conviction, high-concentration investing
Having blocked the market noise about elections from her portfolios, Tengler is putting “all the effort” into the 12 names in her concentrated equity strategy.
Financial powerhouse Goldman Sachs (GS), which on Wednesday reported better-than-expected third-quarter earnings, is the only bank stock in the 12 best ideas portfolio.
“Goldman Sachs gets 94% of their revenue from non-interest incomes and that’s where we want to be focused,” she said.”They have more levers to pull, they’ve got fee income, trading income, and investment banking income which benefits from increased activity in the IPO and M&A market. And it’s a stock that’s pretty cheaply valued.”
The stock, which is down almost 8% this year, has been yielding about 2.4% in dividend this year.
“What we find with large companies is that typically when the management is raising the dividend, they’re doing that during periods of optimism about future sustainable earnings power,” she explained. “And that’s another reason why we’re bullish.”
Despite its over 70% surge this year, FedEx (FDX) remains a top holding in the best ideas portfolio.
“If we are returning to a period of global synchronized growth, which it would appear we are based on the global PMIs, then FedEx is going to benefit exponentially,” she said.
In the tech sector, Tengler is most bullish about software giant Microsoft (MSFT), whose stock has gone up almost 40% this year.
“Microsoft is capturing an increasingly dominant amount of cloud spend. We all understand Amazon is the leader, but Microsoft is closing the gap,” she said.
“It’s a high-conviction name because it’s an extraordinarily well-managed company that is benefiting from higher cloud spend, software spend as well as gaming, Microsoft teams, and LinkedIn.”
While the portfolio is highly concentrated with large exposures to the tech sector, Tengler is not too worried about the recent US House antitrust investigation into big tech companies including Alphabet, Amazon, Apple, and Facebook.
“I don’t see it happening,” she said of the call for the “breakup” of the tech giants. “Apple may have to cut its prices on the App Store and that would hurt stock price marginally. Amazon leads in online commerce but they aren’t dominant in the retail space overall.”
As a high-conviction investor, Tengler is not concerned about anyone replicating her strategy either.
“I’m not worried about anybody doing it because it takes a lot of conviction and it’s hard to do,” she said.
Here is the full list of the 12 “best idea” stocks that make up Tengler’s concentrated equity strategy:
1. Apple (AAPL)
2. Broadcom (AVGO)
3. Cisco (CSCO)
4. Facebook (FB)
5. FedEx (FDX)
6. Goldman Sachs (GS)
7. Home Depot (HD)
8. Johnson & Johnson (JNJ)
9. Microsoft (MSFT)
10. Palo Alto Networks (PANW)
11. Starbucks (SBUX)
12. Walmart (WMT)