We're Seeing a Subtle Rotation Away From Big Tech

 | Jul 28, 2017 | 8:00 AM EDT
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Wha' happened? The words of the great Fred Willard from "For Your Consideration" were echoing in my head as I watched the Nasdaq's sudden intraday reversal on Thursday. I flipped on CNBC. Bob Pisani did not have a simple explanation for Thursday's trading pattern, either.

A general state of confusion is indicative of the phenomenon I have mentioned in several of my recent Real Money columns: group rotation. When institutional portfolio managers rotate out of a sector they do it with little fanfare and no prior notice. It just happens, and it's not event-driven. We are all so addicted to the 24/7 news cycle that affects stocks as much as other news categories that we often miss the forest for the trees.

So, I believe we are in the midst of a subtle rotation away from the megacap tech names and into less glorified sectors. Don't misunderstand the pattern, though. A non-event driven change in strategy can always be outweighed by an event. When Action Alerts PLUS charity portfolio holding Facebook (FB) exceeds market estimates in its key metrics, the stock will pop. In fact, I was surprised FB shares did not rise more in yesterday's trading.

The reverse is also true, though. We saw that with earnings from Alphabet (GOOGL) . The company's CFO, Ruth Porat, a longtime veteran of Morgan Stanley, was speaking the language of Wall Street when she noted the Google business is run for absolute dollar profits, not percentages of profit margins. She was clearly signaling to analysts that margins at Google will remain pressured in future quarters, and, by implication, consensus earnings estimates are too high.

That the analyst community didn't rush en masse to cut estimates is a commentary on the parlous state of today's equity research, not the profitability in Google's core search business. So, the sell-side may have missed it, but the buy-side didn't, and I think GOOGL shares are headed to the $800s in direct fashion.

But where are fund managers shifting their holdings? It's not cash, and it certainly isn't into the protection of S&P 500 options contracts, as evidenced by the extremely low level of the VIX. No, I believe active managers will be much more diligent in finding undervalued sectors as we move through the second half of 2017.

The classic rotation is out of tech into financials, but the elevated valuations in that sector make that less likely. I believe JPMorgan (JPM) is the best-run company in the U.S., if not the world, but there is no way I'm paying 1.75x tangible book value for a bank stock. That's crazy.

I believe the laggards of 2017 will shine in the second half. Oil inventory figures have been quite encouraging in recent weeks, and I believe oil prices will regain the $50/barrel mark in short order.

So, energy stocks are a good bet here, and I included two energy picks -- Helmerich & Payne (HP) and Occidental Petroleum  (OXY) -- in my RM column devoted to my favorite high-yielding names for the second half.

Other sectors with enticing yields are telecommunications, REITs and even the autos. Those sectors have lagged the market thus far in 2017, but watch for them to catch up to the FANG names in the second half.

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