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    Home»Investment»Take profits if March CPI only matches expectations, investors say
    Investment

    Take profits if March CPI only matches expectations, investors say

    By Staff WriterApril 10, 20244 Mins Read
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    Now may be the time to build positions in losing stocks, with March’s key inflation report unlikely to come in better than economists’ expectations, according to two investors. Jeff Kilburg, founder and CEO of KKM Financial, believes that Wednesday’s consumer price index reading is likely to either match expectations, or settle higher. Given the current strength of the U.S. economy and consumer spending, not to mention the five-month rally in stocks, Kilburg sees little chance of inflation easing soon. As evidence of investor nervousness over the chance of stubborn inflation being reported Wednesday, Kilburg pointed to the sell-off that plagued stocks late Tuesday morning before the market bounced back. “You were seeing today a little bit of nervousness in some of the names that have really enjoyed the belief that interest rates” are coming down, Kilburg said in an interview. “If you think of tech, if you think of some of the rate-sensitive names, you’re seeing some profit-taking today. That’s by and large because people have to be prepared for the fact that if we have hotter-than-anticipated CPI data then the Fed may be forced to not kick off this interest rate-cutting campaign.” Kilburg is prepared for as much as a 5% pullback in the S & P 500 if March’s consumer price index does come in much higher than economists have estimated. “No one’s ever gone broke taking profit,” he added. Mike Bailey, director of research at FBB Capital Partners, agrees with Kilburg’s assessment that the CPI report will do no better than match expectations, and might well come in worse than forecasts. “There’s more upside risks than downside risks,” Bailey said of the inflation outlook, “just looking at all the other metrics we’ve seen suggesting it,” such as the surprisingly strong March nonfarm payrolls and February factory orders reported last week. Buy more stocks lagging the market With inflation likely to do no better than come in as expected, Kilburg is focused on trimming some of his winning positions, including Meta , Nvidia and Amazon , but not exit them entirely. Conversely, Kilburg is adding to positions that have lagged the market, such as industrial and health-care stocks. He highlighted UnitedHealth , Lockheed Martin and 3M as among his favorite “boring, blue-chip names.” “Those are three names that I believe are blue chip, essential names to the U.S. economy,” he said. Post-it note and adhesive maker 3M, for example, earlier this month completed the spinoff of Solventum , its health-care business. UnitedHealth and other health-care stocks are also trading at a discount, Kilburg said, citing Johnson & Johnson as a potential winner. “J & J is a name where it hasn’t really seen the momentum, so I think there’s an opportunity and a discount there as well as a laggard,” he said. Buy cyclical names Bailey, formerly a health-care analyst at Legg Mason and Stifel Financial before joining FBB in 2015, expects a hotter-than-forecast inflation report on Wednesday would take stocks lower. In that event, defensive stocks with high dividends in real estate, utilities, consumer staples and telecommunications — what Bailey called RUST stocks — are likely to come under pressure as their dividends fail to compete with Treasury yields. Hot inflation could also make long-term technology earnings look less attractive, leaving them vulnerable to a downdraft. But cyclical stocks that stand to benefit the most from economic growth tend to outperform when inflation is high, Bailey said, citing financial, energy and industrial companies. Bailey is especially keen on financials, preferring insurance stocks or companies exposed to that industry. He highlighted Marsh & McLennan , Progressive and Berkshire Hathaway as examples, and also thinks Visa stands to gain. “Visa is in between a tech company and a financial, but higher prices go straight to their bottom line,” Bailey said. The Johns Hopkins MBA also sees the larger, diversified banks as attractive in a climate of higher inflation and interest rates. Among industrial, transportation and energy providers, Bailey touted Union Pacific , Old Dominion Freight Line and Chevron as stocks he likes. Returning to his former specialty, Bailey said UnitedHealth stands to benefit from the same tail winds as the insurance industry by being able to pass on costs from higher-than-expected inflation.

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