October 2, 2018

In 1964, a Swedish art gallery held a show. Amongst many works by many artists, the gallery displayed four new paintings by an unknown artist named Pierre Brassau. All the art critics who viewed the paintings praised his work.  They called it “avant-garde” and got excited about this newcomer:

“Pierre Brassau paints with powerful strokes, but also with clear determination. His brush strokes twist with furious fastidiousness. Pierre is an artist who performs with the delicacy of a ballet dancer.”

The first person to buy a Brassau proudly stood for a photograph (below, right). He paid $90 (the equivalent of $600 in today’s money) for this new masterpiece.

Only one critic was not so enthused. He wrote, “only an ape could have done this.” It turns out that he was dead right. The stunt was a clever experiment by a journalist who wanted to put art critics to the test. Pierre Brassau was “Peter,” a 4-year old chimpanzee from the zoo. (Pierre is French for Peter.)

And then, talk about doubling down. even after Åke “Dacke” Axelsson, the journalist revealed Pierre as a hoax, Rolf Anderberg (one of the critics who had praised the work) insisted that Pierre’s work was “still the best painting in the exhibition.” That must not have made the human painters at the show feel great.

We humans can create phenomenal structures and advanced technology. We can do astounding things.  We can also fall into some age-old traps of human frailty. We are impulsive and emotional, but we have also developed the capability to carry great thoughts forward on a huge scale.  Still, one key Achilles heel is assumption. Everyone just assumed Pierre Brassau was a painter.  And to be fair, why wouldn’t they?  That’s what they were told! We tend to take things at face value.  We are a very trusting lot, us humans.

This happens all over the place  in investing, too.  We trust brokers telling us about a “good buy.” We never think to ask if they get more commissions for pushing some products over others. To be fair, there are many quality brokers who put their clients’ needs before their own, but there are also plenty who don’t. We also trust friends at cocktail parties on their hot tips. We don’t question the source of their tips, but seem satisfied with some vague and cursory explanation of why their stock is the next big thing.

I don’t mean to rub salt into some old (or new) wounds, but this is how bubbles inflate. Assumption breeds confidence. Confidence breeds hubris. Bragging and a need to be thought of as a “winner” breeds curiosity in others.  Curiosity often turns into greed. Greed then spreads and goes viral. Then “POP!”

This process was the same for Tulips, the Gold Rush, the 1987 stock market, Internet stocks, and the housing bubble. The most recent example is the Bitcoin craze.  The few who made millions became the inspiration for the many that gave away their savings and in some cases bet the farm to ride into riches.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I see an unsettling fervor now growing in weed stocks. Cannabis companies are very much at the forefront of a future big industry.  Legalization is pretty much assumed (danger, there’s the “a” word again!). Investors are now clamoring to buy stocks that they think may become the next big thing.

The problem is, a vast majority of the listed stocks in the cannabis space don’t make any money and have no sales.  They trade at nonsensical or even infinite multiples. Even I feel silly sometimes not participating in crazes like these, but I feel less silly when they inevitably come crashing down.

I have found one surefire way to profit from the stock market. That is buying companies with growing sales and earnings, low debt levels and growing market share in leading industries. When looking to find winners, I begin looking for which sectors are exhibiting a long-term trend. Recent weeks of activity show us that we are in a market that’s sloshing around.  Sector leadership has rotated frequently recently.

Introducing a “New” (Supercharged Old) S&P Sector: Communications Services

Instead of going into performances this week, I would like to introduce the new S&P sector, the Communications Services sector.  It includes the stocks formerly in the Telecom sector, like Verizon and ATT, but it also many of the Information Technology and Consumer Discretionary stocks. As a result, Information Technology may become a less attractive sector going forward. This is because Facebook and Alphabet are moving from Infotech to Communications Services, while Netflix, Disney, and Comcast are moving from Consumer Discretionary to Communications. As a result, our “boring” and limited old Telecom sector has been given a supercharge with these new stock holdings.

Regarding the Big 5 FAANG stocks, Facebook, Alphabet and Netflix will compose 49% of the new sector, while Apple remains in Info Tech and Amazon remains in Consumer Discretionary.

In time, we will get comfortable with these changes. This change both is and is not a big deal. The imbalance in the Telecom sector, which I have highlighted for years, has now been at least partially addressed with these new changes. As far as it not being a big deal, individual stock performance is still what we ultimately care about, so it really doesn’t matter in which sector these leaders reside.

We will see some shifting in our sector analysis going forward, but rest assured – all I really care about are which are the best leading stocks in each sector and how they can as a group push the markets higher.

(Please note: Jason Bodner does not currently hold a position in Verizon, AT&T, FB, Netflix, Disney, Comcast Apple, and Amazon but does own Alphabet. Navellier & Associates does not currently own a position in Verizon, AT&T, FB, Netflix, Disney, Comcast Apple, and Amazon for client portfolios).

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

When selecting investments, don’t be fooled by a monkey. Take your time and do your homework. If not, you may end up with a Brassau. “To be prepared is half the victory.” – Miguel de Cervantes

About The Author

Jason Bodner

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. *All content of “Sector Spotlight” represents the opinion of Jason Bodner*


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