36 BARRON’S March9,2020
Q&A
Stocksfora
Post-Virus
World
Photograph byBEN SKLAR
A
few years before the start of this decadelong
bull market, Paul Hickey, 45, and Justin Wal-
ters, 38, launched Bespoke Investment Group,
a subscription research service that dissemi-
nates their stock market insights and invest-
ment recommendations. They’d met as
researchers at the strategy shop Birinyi Asso-
ciates before launching their Harrison, N.Y.–based firm in
May 2007. Bespoke helps clients stay mindful of histori-
cal market facts and current opportunities. They have
made some good calls: They became market bulls in early
2009, and toldBarron’sreaders to buyNetflixandFace-
bookin 2015.
The coronavirus has proved to be a particular threat to
both the aged population and the aged bull market, so we
visited the Bespoke founders for perspective. An edited
version of our conversation follows.
Barron’s:The market’s in the sick ward. What now?
Paul Hickey:We look at events like this historically.
When you see these very quick shocks to the market,
there’s a short-term unsettlement. But over six to 12
months, you’ve seen better-than-average market returns.
It’s a matter of the market finding its footing. Right
now, we’re trading more on the fear of what could happen
rather than what’s actually happening.
Justin Walters:It’s really easy to say, “Buy low and sell
high,” but when emotions get running, investors typically
do the opposite. We like to keep our emotions in check
and look at historical data. And history shows that in
times like these—when markets are panicking—that’s not
when to sell. We look for buy opportunities.
Where were markets before the virus?
Walters:Coming into the Feb. 19 high, the S&P 500
index was up 17% from October. Markets were very ex-
By BILL ALPERT
An Interview with Justin Walters and Paul Hickey,
Founders, Bespoke Investment Group
Justin Walters, left,
and Paul Hickey
March9,2020 BARRON’S 37
The pair launched their subscription research service a few years before the
long-running bull market began. They became bulls in early 2009, and told
Barron’sreaders to buy Netflix and Facebook in 2015.
tended, which increased valuations, as
well. So all we’ve done really is re-
versed those gains and gone back to
where we were in mid-2019.
Hickey:In February, the S&P 500’s
price/earnings ratio was in the 99th
percentile relative to the past 10 years—
which is obviously stretched. Now
we’re in the 75th percentile. So the pull-
back has reset valuations.
Coming into the year, we were look-
ing at a neutral set of pros and cons, a
relatively even balance. That made us
expect an average year for stocks going
forward. Now, we’re down 6% on the
year, so you have to place the bias to-
ward looking for above-average returns
going forward.
The coronavirus is creating uncer-
tainty, but eventually that will play out.
Then the market will return to a more
firm footing.
You watch certain measures of the
market. What are they showing?
Hickey:Right now, it’s extremely over-
sold—from a price perspective and
market internals, like breadth [the
number of stocks affected]. Every way
you look at it, it’s extremely oversold.
When things get this oversold, you
want to look for buying opportunities.
Dare I ask for a forecast for the
broad markets?
Walters:Coming into the year, we
were looking for an average year for
equities. You know, mid-single digits in
percentage returns. So now that we’re
down 6%, the potential for, say, a 10%
gain from here is that much more at-
tainable.
Hickey:With this coronavirus, there’s
uncertainty in how many cases there
are going to be. We haven’t even really
started testing for it here. But you can
envision an end to it.
With past big, finance-related
events, there was less of an end in
sight. The peak hysteria over this virus
is going to be measured in weeks and
months, not longer. It will pass rela-
tively shortly. And once we do move
past it, the election comes into view.
How is the election relevant to
markets?
Walters:If you’re looking at betting
odds, President Donald Trump has a
roughly 60% chance of winning re-
election, which means the Democratic
candidate has a 40% chance. Be it
[Bernie] Sanders or [Joe] Biden.
Hickey:The common trend for years
when you have a president running for
re-election tends to be flat-to-negative
returns. Then the market picks up in
the second half of the year, as the mar-
ket figures out what’s going to happen.
Health-insurance stocks were down
big; now, they’ve rallied with the
changing tide on the Democratic side.
Which non-U.S. markets should we
be talking about?
Hickey:It has been a lost decade for
emerging markets and a lot of interna-
tional markets. As an investor, it’s very
important to have diversification.
We’ve been positive on those markets
for the past year or two, and we haven’t
yet seen the outperformance. The dol-
lar has been strong recently, but that
won’t last forever. When the dollar
does start to weaken, emerging mar-
kets will be a primary beneficiary.
As an asset class, it’s easy to have
exposure there. TheiShares MSCI
Emerging Marketsexchange-traded
fund (ticker: EEM), for instance, has
more than a 3% yield.
All of the S&P sectors have been
clocked by the virus. Are there any
industry distinctions?
Walters:While valuations for the
broad S&P 500, coming into mid-
February, were in the 99th percentile,
financials remained in the 60th and
70th. And after the steep decline we’ve
seen, those valuations for financials
have dropped all the way to just the
bottom one percentile of their 10-year
range. So that’s definitely a sector
where the valuations have come in
really low. Yet default risk for the
sector remains extremely low. We’d
recommend an overweight exposure.
So, buy financial stocks. Are there
specific ones you like?
Walters:If you want to buy the entire
sector, use theFinancial Select Sec-
tor SPDRETF (XLF) or theSPDR
S&P BankETF (KBE).
Or even the individual stocks of the
large banks, likeBank of America
(BAC) orGoldman Sachs Group(GS).
Since the financial crisis, their balance
sheets are so much stronger. They have
the ability to raise dividends, as the
regulatory environment has gotten less
stringent on them.
Any other sectors that we would
have been discussing if we weren’t
in the isolation ward?
Walters:Energy is tough, right now.
Sentiment is so negative on the sector.
You’ve got the whole ESG [environ-
mental, social, and corporate gover-
nance] trend, which is really hurting
things. The energy sector’s weighting
in the S&P 500 has dropped to 3.5%—
which is smaller than utilities and
something we haven’t seen since at
least 1990. Just over 10 years ago, en-
ergy had a weighting of nearly 16%.
So, as a matter of asset allocation and
long-term mean-reversion, we think
the energy sector’s not going away. It’s
a good time to probably pick some up
something like theEnergy Select
Sector SPDRETF (XLE).
Which stocks do you like?
Hickey:One we like right now is
Albemarle(ALB), which is a lithium
producer. They are one of the largest
players in the lithium market in the
U.S. There is a secular growth trend,
with the move to electric vehicles and
battery storage of solar power. Right
now, lithium prices are weak, but
that’s a temporary phenomenon as
they right-size their production.
We’re going to see double-digit
growth in the market over the next
five years, as the electric-vehicle mar-
ket grows.
Historically, we’ve seen a correlation
between the performance ofTesla’s
stock (TSLA) and those of the lithium
producers. If Tesla’s stock is too crazy
for you to buy right now, Albemarle or
theGlobal X Lithium & Battery
TechETF (LIT) are good ways to gain
exposure to the battery-electric sector
without having to reach for Tesla.
Any others?
Walters:Two videogame stocks:
Electronic Arts(EA) andActivision
Blizzard(ATVI). We like the long-
term outlook for the gaming industry,
with the rise of esports. Those two
stocks underperformed on a relative
basis in 2017 and 2018, so they haven’t
gotten as stretched as other consumer
tech names.
Hickey:Yo u h aveMicrosoft(MSFT)
andSony(SNE) releasing new con-
soles later this year. Videogame stocks
tend to outperform in the months lead-
ing up to the release of new consoles. If
we’re stuck in a pandemic, what better
way to pass the time than that?
When we’re “working from home.”
Hickey:Switzerland just banned
events for more than 1,000 people.
Schools are closing around the world,
so if you can’t go out, you’ll be more
likely to play a game at home.
Another stock we like isSlack
Technologies(WORK). It’s one of
the stickiest applications that any
worker is using these days. Once they
start using it, they always use it. The
fact that it has become a verb—“Slack
me,” rather than “email me”—just
shows the power of the platform and
the fact that it’s not necessarily a
flash in the pan.
The worry is the competition from
Microsoft. But engagement statistics
for Slack are so much higher than they
are for Microsoft Teams, which is a
product they’re giving away. Slack is
something that people actually pay for.
The company came public at over $40,
and it’s in the high-$20s now. It’s not a
company that’s levered up or burning
through cash.
Walters:And as we were saying with
the videogame stocks, if you are going
to be stuck at home and working re-
motely, you’re going to need an applica-
tion like Slack.
Any investments you don’t like?
Hickey:Long-term Treasuries. The
S&P 500’s dividend yield is now more
than a full percentage point higher
than the yield on the 10-year Treasury.
That only happened once before—
during the 2008 crisis. When you’re
looking at a 1% Treasury yield, that
“income investment” just isn’t
providing much in the way of income.
Thanks, Justin and Paul.B
Bespoke
Picks
iShares
MSCI Emerging
Markets ETF
EEM
Financial Select
Sector SPDR ETF
XLF
SPDR S&P Bank..........................
Bank ETF
KBE
Bank of America
BAC
Goldman
Sachs Group
GS
Energy Select
Sector SPDR ETF
XLE
Albemarle.................................
ALB
Global X Lithium &
BatteryTechETF
LIT
Electronic Arts............................
EA
Activision..................................
ATVI
Slack Technologies......................15,
Technologies
WORK
Bespoke
Pan
Treasuries
“When things get this oversold, you want to look
for buying opportunities.”—Paul Hickey