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3 Stock Picks From a Fund Manager Who’s Beaten 98% of Peers Since 2017 – Business Insider

  • Michael Cuggino believes the investing landscape could be at an inflection point.
  • He said interest rates could be set to rise for the long-term for the first time since the 1980s.
  • He warned that investors may not be appropriately pricing in such a shift.

Michael Cuggino runs his multi-asset Permanent Portfolio Permanent (PRPFX) mutual fund with an explicit goal of not just growing investors’ capital, but preserving it.

That may sound like an obvious modus operandi for a money manager, but in today’s inflationary environment — with the Consumer Price Index at a 41-year-high of 8.5% — it’s a valuable mindset to have. 

Rising prices are diminishing the value of money and threaten to slow down economic growth as the reactive Federal Reserve hikes interest rates. The aggressive tightening from the Fed has caused bond yields to spike and growth stocks to correct, meaning major stock indices have had a bumpy start to 2022. Year-to-date, the S&P 500 is down 7.2%, and the Nasdaq Composite is down 14.3%.

Cuggino thinks about its impacts a lot. He still thinks it poses a broader threat than its role in fueling tighter monetary policy in the near-term. Cuggino believes elevated inflation could mean a long-term turning point in the direction of interest rates. The federal funds rate has steadily fallen since the early 1980s, and currently sits between 0.25 and 0.5% after the Fed hiked rates in March for the first time since 2018.

fed funds rate over the decades

Federal Reserve Bank of St. Louis

Last spring, Cuggino warned of the impact it could have on investor behavior, as two generations of investors haven’t seen meaningful inflation in their lifetimes until now. Cuggino reiterated this point last week.

“Given all the macro issues out there, there’s a legitimate chance that this is a cycle turn in interest rates, and a lot of people haven’t managed this before, whether it’s professional investors, retail investors. So there’s a little bit of an uncertain factor and I think this adds to the volatility . What are investors going to do when they really have to manage something like this?”

He added that he doesn’t believe investors are appropriately accounting for such a substantial long-term shift. 

“I don’t think some of these risks are adequately priced in yet,” Cuggino said, talking about inflation, rising rates, and geopolitical tension.

“Equities are only mid-single-digits off their highs. Does that make sense given some of the inflation and macro risks?” he continued. “Some people might say yes, I personally don’t.”

He also said there is “something wrong the picture” of inflation being 8.5% and the 10-year Treasury yield being under 3%.

Cuggino warned, too, that persistent inflation could affect consumer and business spending by creating uncertainty, hurting the stock market. 

“If prices are going up, the higher they go, the more you’re going to think about spending your money, and the more you’re going to plan with higher prices going up,” Cuggino said. “So what do you do? Maybe I don’t take that vacation. Maybe I buy lower quality furnishing for my house. Maybe I don’t buy premium consumer goods.” 

3 stocks for an inflationary, rising rate environment

Because monetary policy is expected to tighten for the foreseeable future, Cuggino likes more cyclical stocks. 

The first is Freeport-McMoRan (FCX), a copper-mining firm that he said would benefit from rising commodity prices as a result of the global economic rebound. 

“We expected demand to be strong for the next several years,” he said, adding that copper prices remaining elevated directly benefits the company’s bottom line. 

He also likes the firm’s history of growing dividends and share buybacks.

Freeport-McMoRan is the top stock holding in the Permanent Portfolio Permanent fund at 4.17% as of the fourth quarter 2021. Cuggino’s fund has outperformed 98% of similar funds over the last five years, as well as year-to-date. Cuggino has managed the fund since 2003. 

Next, Cuggino is bullish on Occidental Petroleum (OXY), an oil company, as another play on strong commodity demand amid the continued economic recovery.

“It’s the same story: energy prices are up, you’ve got profits that are growing, it’s a pretty inelastic price,” he said. “People need certain levels of energy regardless — there would be demand destruction of some point, but you still have to live your life. And so likely profits are going to go up, and that means higher earnings, higher dividends, higher cash flows, buybacks, etc.”

Third, Cuggino said he likes regional banks, and listed First National Bank (FNB) as one of his favorites. Banks tend to benefit from rising interest rates as they can charge more for lending money.

Cuggino said the bank has a growing wealth management business and a strong residential lending business line.

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