Three potential rotation trades for 2021

Kevin Mahn, Hennion & Walsh CIO joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

AKIKO FUJITA: Let's put the valuation question to the test here to our next guest. Kevin Mahn is the Hennion and Walsh CIO. Kevin, you've been hearing us walking through some of these strong numbers. It feels like those growth names continue to grow. And yet you've said that the rotation is out of growth. So how do you square that with some of the numbers that we've gotten over the last day or so, especially a company like Zoom?

KEVIN MAHN: Yeah, sure. There's three specific rotations that we're following in 2021. One is that rotation from growth to value, which you speak to. Secondly, the rotation from US stocks to international stocks, notably emerging markets. And then finally, the rotation from US large cap stocks to US small cap stocks.

Thus far in 2021, clearly the rotation from those larger cap names, which are excessive and valued right now, just looking at the PE of the S&P 500, well above 30 versus a 10-year average price to earnings ratio of around 18 and 1/2, suggests that there may be more attractive growth opportunities in smaller cap names. And we've seen smaller cap outperform by over 10% thus far this year.

On the geographic front, we've seen emerging markets outperform US markets thus far this year. Although international developed markets are roughly neck and neck with the US markets. And for the first time in recent memory, value stocks are now starting to outperform growth stocks, although they underperformed, Akiko, by over 36% last year.

And some of the areas where we're seeing that outperformance are in some of the sectors that are showing leadership thus far this year. Energy, financials, real estate, industrials, those traditional value oriented names that pay good dividends seem to start being worthy of more consideration.

ZACK GUZMAN: Yeah, and Kevin, I mean, we know-- we know the warning about past performance and what that means for what could lie ahead here. So talk to me about that because people might look at energy and say, look, that's a very hot sector to start off the year. That might be one that a lot of investors out there were under allocated to. But I mean, does that catch up? Does that form of fuel that then for the rest of the year or is it just kind of expected that you would start to see those returns come back into the average year?

KEVIN MAHN: Yeah. I think you have to look at some of the areas that have been outperforming and what areas we anticipate outperforming are providing leadership as we move through the COVID-19 pandemic. We now have three approved vaccines, which should allow the economy to potentially reopen quicker than we anticipated, accompanied by the likelihood that additional $1.9 trillion spending bill will be passed this week by the Senate.

So where do you look to? We think it's some of those areas of leadership that were in place during the course of the pandemic. Those being smaller cap providers of disruptive technology, such as artificial intelligence, robotics, cybersecurity, we still think biotech offers attractive upside growth opportunities. And I'll just go back to the lead in and their earnings reports, ecommerce.

Ecommerce isn't just a passing trend or a current fad. In fact, it's estimated that one of every four purchases by 2024 will be done online. Right now, they stand at about 16%. So there are more opportunities in ecommerce, but not just limited to the traditional etailers. Consider some of the industrial REITs, the warehouses, the distribution centers, even the payment processors. They also offer ecommerce growth opportunities.

AKIKO FUJITA: Yeah, I'm glad you mentioned that because it feels like when we talk about ecommerce, I mean, every company has had to become an ecommerce play because of this-- the push to delivery, especially during the pandemic. So the warehouse plays an interesting one for me. What about software, as well? We've seen so many companies that have really helped out with sort of the back infrastructure, especially as some of these medium-sized businesses really transition and grow their presence online.

KEVIN MAHN: Yeah, and if you consider, Akiko, the full breadth of the ecommerce ecosystem. I mean, you can put Amazon at the hub of that because certainly Amazon is at the center of all ecommerce activities. But just look at the life cycle of an online purchase. It generally starts with going onto your tablet, your mobile phone, your desktop, your laptop, pulling up a search engine.

Finding the merchant or the product that you're looking for. Putting in your shopping cart, putting in your payment detail. Sending it off to the retailer, the retailer finding that product. Putting in their distribution center, ultimately delivering it out to the end customer, and then payment is consummated. That's a lot of different companies, and industries, and technologies that have been touched by that one transaction.

And those technology providers that can link the consumer to the online merchant, not only for the consummation of payment, but also for the transaction of that information, are of critical importance. And helps companies like Lowe's expand their online footprint, Home Depot expand their online footprint, Walmart, Kohl's to a lesser extent. Certainly help Target with some of the numbers that you reported earlier. You need to have an effective and efficient online presence to meet the ongoing needs of the consumer, both from a safety perspective and also from convenience perspective.

AKIKO FUJITA: To your point, that ecosystem getting bigger and bigger when you talk about ecommerce. Kevin, it's good to talk to you today. Kevin Mahn, CIO of Hennion and Walsh.