Weekly Wrap: Market Uncertainty, Stocks to Watch, and Top Small-Cap Funds
And when it comes to investing, to thine own self be true.
Uncertainty about the newest coronavirus variant’s impact on the economic recovery has roiled the stock market. In addition, comments from Federal Reserve chairman Jerome Powell that it’s time to stop referring to inflation as “transitory” and that the Fed’s tapering may happen sooner than expected have only further jostled stocks.
Some say that investors should tune out market volatility and maintain a long-term perspective. But others, including Morningstar director of personal finance and retirement planning Christine Benz, advise that there are things that investors can do to take control of their portfolios during turbulent times. We’ve pulled together some of Christine’s top ideas in our Guide to Market Uncertainty.
Those investors who typically “buy the dip” no doubt have their watchlists at the ready when stocks tank. Don’t have a watchlist? No problem. Three high-quality, well-run companies whose stocks are worth considering on pullback: Coca Cola (KO), Dominion Energy (D), and Roche (RHHBY). My colleague Jakir Hossain shares more ideas in 3 Wide-Moat Stocks on Sale After the Omicron Sell-Off.
On Monday, Twitter (TWTR) co-founder Jack Dorsey stepped down as CEO, effective immediately. Parag Agrawal, the firm’s chief technology officer, now fills the CEO role. We didn’t make any changes to our $58 fair value estimate, nor to our Morningstar Capital Allocation Rating or Morningstar Economic Moat Rating as a result of Dorsey’s departure, says senior analyst Ali Mogharabi.
“In our view, the firm will be better positioned to increase user monetization and expand margins under Agrawal as Dorsey could not focus mainly on Twitter’s future when also leading the narrow-moat Square (SQ),” Ali says. Only time will tell whether Agrawal can foster the type of innovative culture that Dorsey did, though. As of this writing, we think Twitter’s shares are undervalued.
(Dorsey had a busy week: On Wednesday, Square announced it is changing its name to Block. No matter what you call the company, its stock is outrageously overpriced today, according to our metrics.)
As we enter the year’s final stretch, many investors’ thoughts turn to portfolio matters. We consider what did well for us this year, what didn’t, and where we should make some changes.
For many, small-cap stocks continued to disappoint this year. Oh sure, the Morningstar US Small Cap Index is up about 11% this year as of this writing--which is nothing to sneeze at. But the Morningstar US Large Cap Index is up more than 20%. Despite some changes in leadership during the course of the past 12 months, large-cap stocks have, in general, dominated.
Contrarian types--or those who find their exposure to small-cap stocks otherwise lacking--can find some small-cap funds to investigate further in my Our Picks column, which highlights 11 active and passive mutual funds and exchange-traded funds that earn our highest Morningstar Analyst Rating.
Diamond Hill Small Cap (DHSIX) is just one of the gems on the list. Morningstar’s Dan Culloton, who follows the fund, points out that managers Chris Welch and Aaron Monroe look for stocks trading below their intrinsic values, but they’re not deep-value types; rather, they prefer business with stable cash flows, good managers, and sturdy balance sheets. “Buying the shares of decent businesses when their prices are depressed, as Welch and Monroe attempt to do, has delivered good risk-adjusted returns over time,” says Dan.
My colleague Sachin Nagarajan wrote an article this week about lessons he learned from ARK Innovation ETF (ARKK). What I enjoyed most from Sachin’s investment confessional was his growing awareness of what matters to him as an investor. Not to steal his thunder--please read his article!--but Sachin has discovered, despite his long runway to retirement, he isn’t a fan of volatility and prefers “forget-them” investments. A while ago, Christine Benz also shared some personal investing preferences she has developed over time in My 'Too Hard' Pile Is Pretty Big. What are your preferences? Have you articulated them in any way? Doing so may help you declutter your portfolio or uncover holdings that may no longer mesh with who you are as an investor today. An exercise to consider before you review your portfolio at year’s end, perhaps!
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Morningstar, Inc. does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.