Bill Gross, the famous bond guru, has retired from managing other people's money. He is, however, still active in the markets and appeared on CNBC to talk about his investments. Gross once had the ability to move the bond markets by talking, so he's definitely an interesting guy to listen to.
Gross opined that the interest rate play for the world is gone. There are no more interest rates to be lowered by central banks. Logically, the fiscal stimulus has to take over because monetary policy is exhausted. In the current environment, Gross shares three stock ideas he likes:
Annaly Capital
Annaly Capital Management Inc. (NLY, Financial) is a mortgage real estate investment trust. It is about 5 to 6 times levered. It is dependent on the spread between the two- and the 10-year Treasury. It doesn't do well in an inverted yield curve environment, which we're just coming out of. Now the spread has widened again. The yield on Annaly Capital is about 12%.
If the Federal Reserve continues with its “new baby QE,” that should widen the yield curve and should be good for banks and organizations like Annaly Capital.
Yield curve flattening is very risky for the financial sector. From there, it spreads into the rest of the market. It is interesting that Gross words it this way. Very often, I hear people talk about the yield curve as a predictor or signal of a pending recession. Gross seems to view it as an "active contributor" to a recession. Baby quantitative easing will not push up all stocks. Gross doesn't seem to expect much of it.
Invesco
Invesco Ltd. (IVZ, Financial) is an investment management company. Gross doesn't say, but this whole sector is trading at depressed valuations. If you look at the data from GuruFocus in the table below, you can clearly see how financial services is among the sectors that have the least demanding valuation in the S&P 500 (SPY):
Invesco trades at a price-earnings ratio of 6. The company sports a 7.5% yield. The sector is trading at these valuations as active management is under attack. Passive funds that charge zero or even negative fees are taking flight.
However, Gross likes that Invesco has a lot of closed-end funds out there. Closed-end funds are theoretically perpetual vehicles that tend to charge high fees. It is one of the most attractive asset types to have under management. Some even charge performance fees as well.
Allergan
His final pick is Allergan PLC (AGN), which is in the process of being acquired by AbbVie (ABBV, Financial) in a cash-and-stock deal. There is still a good 7% to 8% spread to the consideration. I happen to be long Allergan as well. I've owned it since before the recent bid. The spread is currently 7%, as Gross mentioned, but the expected value is likely a bit higher because it could close in the first quarter of 2020. The annualized spread (not accounting for odds of deal failure) is significantly higher.
At the same time, there are risks involved with this deal. AbbVie backed out of a big deal previously with Shire (SHPG, Financial) (this had to do with a tax inversion that was under siege by the government, so I'm not holding it against them too much). China could withhold regulatory approval. I don't think it is stricly required for this deal, but it could really mess things up. The truth is, this is a big factor in a lot of deals going on currently. The Chinese merger and acquisitions regulator, Mofcom, has a very wide range of deals it considers to fall under its jurisdiction. It is casting a much wider net compared to European Union or U.S. regulatory bodies.
Disclosure: Long Allergan.
Read more here:
- Steve Eisman's Favorite Shorts and Longs
- Ariel's Rhupal Bhansali's Philosophy of Non-Consensus Investing
- Kyle Bass: Chinese Companies Should Comply With US Laws
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