Trends Watch: Sector Spotlight

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Greg Royce, Founder & CIO, Maximus Long Short Equity Management.

What is your outlook for alternative investments?

The S&P 500 has recouped 70% of its drop since 2/19/20 and is trading at a rich 24x the forward 12-month estimate and 19x the 2021 estimate, according to Bloomberg. The continued market exuberance in the face of 38 million job losses is very surprising to us. As an optimist, I am happy to see the country re-opening, but as a realist, I realize that “re-opening” does NOT mean a V-shaped economic recovery as so much damage has been created from these shutdowns coupled with the likelihood that we will not have a vaccine for another year. We are far from out of the woods. As a result, I think the outlook for low-net exposure, sector-focused, absolute return strategies is highly attractive. I believe the granularity of research and sub-sector expertise can help to differentiate sustainable alpha generation.

What are the greatest opportunities you see and why?

While we seek to own high quality companies that are able to maintain or provide guidance despite the macroeconomic challenges, we think some of the best opportunities exist in our short portfolio. For example, we think the restaurant industry is going to be highly challenged. There are a few names in the industrials sector that have exposure here. Additionally, we think the auto industry and chain is ahead of itself. Which of the 38 million people recently unemployed are going to buy a new or used car who did not already own one prior to the pandemic when they had a job?

On the other side, strength in the DIY Network has been apparent. We have and continue to like Home Depot and Sherwin Williams. We also like the defense sector and think people have missed it a little bit here. Take Lockheed Martin Corporation, for example; it is probably the only name in all of industrials that beat and maintained their pre-COVID-19 earnings guidance. Yet, the stock is up only 2% on the year. That makes little sense to us.

What are the biggest challenges you face and why?

The challenge from the investing perspective is marrying my optimism with the more realistic view of the world.

From a business perspective, the challenge is always fundraising coupled with managing the costs of an institutional-ready infrastructure. We have grown our regulatory AUM from $10 million in September 2019 to $158 million in May 2020, but it has been due to lots of hard work and stress along the way.

What keeps you up at night?

One could easily say policy decisions. However, this has been such a difficult and unknowable last three months that it is hard to point a finger. What we do know is that the government and Federal Reserve stand ready to provide support. The biggest issue is they cannot stimulate actual demand. Therefore, once Wall Street and retail investors see the carnage actually created after the first “re-opening bump,” that is when I think the market could significantly correct.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.