Liberty All-Star Growth Fund Offers Access To 2023’s 2 Hottest Sectors
Contrarian Outlook | Oct 13, 2022 05:49AM ET
The 2022 mess has helped protect our dividends from the many messes beyond America’s borders, like the collapsing UK economy, continued COVID-19 shutdowns in China and, of course, Russia continuing to prosecute its despicable invasion of Ukraine.
To be sure, America isn’t an island: all these problems have a knock-on effect on our economy, too. Not to mention the Fed, which is raising rates faster than almost any other central bank in the world.
Nonetheless, our economy continues to perform respectably, with historically low unemployment and stable institutions (quibble as we will with the Fed, I think we can agree that it is making decisions based on the data—whether it’s the right data is open to debate). Other countries (I’m looking at you, UK) can’t boast the relative stability we have now.
Let’s roll through the reasons why we’ll continue to focus our CEF-investing strategy on America as the calendar flips to 2023. Then we’ll discuss an 8.6%-yielding “all-American” CEF that’s well-positioned for gains.
h2 Fed Rate Hikes: We’re Likely Closer to the End Than the Beginning/h2Of course, the biggest story for US stocks this year has been the Fed. With the most aggressive rate hikes in generations, Jay Powell & Co. have raised legitimate fears that they’re being too aggressive and will cause a recession.
Consider that in 2022, rates have risen from virtually zero to 3%, and expectations are that they will keep going up until February 2023, when they will peak at 4.5%. At that point, the Fed looks likely to keep rates steady.
h2 Rates Expected to Level Off SoonSource: CME Group
There are two pieces of good news here: the first is that February is only four months away, and second, steady rates are great for stocks, especially after they follow a string of hikes.
h2 Steady Rates, Steady Profits for Stock Investors
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As you can see above, the last time rates steadied, in late 2018, stocks soared 18% in half a year, which bodes well for us in 2023.
h2 Earnings: Low Expectations Could Drive a Market Bounce/h2Earnings season brings another reason for optimism—and not because corporate profits are going to be high. Quite the opposite.
According to FactSet data, 65 companies have issued negative earnings guidance in the third quarter, higher than the average number of firms giving such warnings over the last five years. This shows that a poor earnings season is largely baked in.
As a result, any firm with even the smallest bit of positive news will likely be rewarded with a bounce in its share price. And there’s one weird quirk of US firms that makes that upside more likely: the dollar.
Source: FactSet
While few firms have reported earnings this quarter so far, as you can see in the chart above, half of them have cited the strong dollar as a negative for their bottom line, as a strong dollar cuts the value of sales made overseas.
While this sounds like a negative, many analysts tend to dismiss disappointing earnings when they’re due to currency fluctuations, because those fluctuations tend to be volatile and not relevant to the business’s fundamental strength. Combine that with already-low earnings expectations and we have a setup for some surprisingly good news in the weeks ahead.
This, by the way, is a big reason why some analysts have already signaled that a rally is likely coming to US stocks, particularly after earnings season hits full swing.
Source: FactSet
Firms that are more exposed to international revenue, like those in communications services and IT, are expected to see the strongest upside, as you can see in the chart above.
h2 An 'All-American' 8.8%-Paying CEF Tuned to 2023’s Strongest Stocks/h2Of course, markets are fickle, and the rebound might come slowly—until fourth-quarter earnings come out early next year, say, or until the Fed starts leveling off its rate hikes (which is also expected early next year, as we noted earlier).
Either way, now is a good time to pick up equity-focused CEFs with high yields—especially a fund like the 8.8%-paying Liberty All-Star Growth Fund (NYSE:ASG).
ASG is skewed toward the two sectors analysts see rising the most: communication services and IT, with top holdings that include SPS Commerce (NASDAQ:SPSC), a maker of cloud-based supply-management software; insurer UnitedHealth Group (NYSE:UNH), whose Optum unit, which provides more than half of UNH’s revenue, supplies cutting-edge tech to streamline healthcare; and Microsoft (NASDAQ:MSFT), which needs no introduction.
The key to successful CEF investing is the fund’s discount to net asset value (NAV), a unique measure to CEFs that shows us where the fund trades in relation to the value of its portfolio (or NAV). In other words, this number can instantly tell us whether a CEF is cheap or pricey.
Right now, ASG trades at a slight 0.6% discount, which doesn’t sound like much of a deal. But with discounts, context is everything. And in the last year, ASG has traded at an average premium of 5%—even with the nearly year-long selloff we’ve been dealing with.
In other words, this one is washed out, even though it holds the stocks likeliest to bounce next year and yields a high 8.8%. That’s a signal that now is a time to buy in, as that unusual discount gives us a margin of safety while we collect ASG’s 8.8% payout and wait for the next market rise to begin.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement ."
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