YWR: Time for a Garbage Rally (anti- QARV)?
Usually, this is the time of the month when we go through our QARV Rankings to find the best quality stocks trading at attractive valuations.
But today we do the opposite.
We’re going to analyze the garbage. The worst ranked stocks for quality.
The anti-QARV.
And why would do that?
Because we could be on the verge of a major style inflection point.
An inflection point where low quality stocks nobody owns do well.
The Set-Up
Fund managers are convinced High Quality will continue to beat low quality over the next 12 months.
71% of fund managers think this. So right there we know this is going to be wrong.
And 48% say large caps will beat small caps.
And everyone is talking about the performance of the Momentum factor. Momentum and Large Cap Growth have been the best performing style factors year to date.
Value and Small Cap have been the worst performing style factors.
Large cap tech and the AI theme are making new highs.
And everyone is underweight the US, Energy, Discretionary, Real Estate and Bonds.
But why might this trend change?
Why might low quality stocks suddenly radically outperform (at least for a painful period).
I mean what could possibly light a fire under unprofitable, over leveraged stocks?
Guys, we have Trump threatening to fire the entire Board of the Federal Reserve if they don't cut rates to 1%. And yet the market is kind of ignoring this as Trump being Trump, thinking how ridiculous it is, and how the Fed needs to fight Trump on this. Typical wrong take on everything to do with Trump.
But let’s be more open minded and consider what might happen if Trump is right. With Fed Funds at 4.25% a move to 1% would be a MASSIVE easing cycle! And yes, Powell is resisting this, but his term is up in May 2026. The rest of the Board has to live with Trump through 2028. They have to consider life after Powell. Some of these terms go to 2032.
These board members all love their cushy board seats.
And a few members will be jockeying for who might be the next Chairman.
So what do you think they are going to do?
Remember, they are ‘board members’, they go along to get along.
What’s the path of least resistance?
Do they want to get in a massive fight with the President, the Treasury and entire administration? And what if the economy suddenly weakens for some reason and they got it completely wrong and Trump ends up being right. That’s the worst case scenario. It’s worse than having inflation above their 2% target. Because if they fight Trump on this, and are wrong, then Fed independence is toast.
Behind the scenes I think these board members will grumble and moan how much they hate Trump and how important it is for the Fed to be ‘independent’, but eventually they will come up with some new economic ‘research’ supporting why rates can be cut to 3%.
It’s not 1%, but a cut to 3% takes the heat off Powell and gets him through until May 2026 when his term ends, and he can gracefully retire. Then the next Chairman can decide whether to cut more.
And that could be the new narrative which changes the market and catches everyone offsides.
We are all talking about AI and big cap tech, but what if the new narrative is a massive US rate cutting cycle?
Suddenly all those junky ‘low quality’ sectors everyone hates, which have balance sheet issues, get a new lease on life?
And yes, I know the macro guys will push back that the yield curve will steepen and 10yr yields won't fall, but maybe 5 years do, and maybe that’s still helpful, and maybe these low quality stocks go up regardless.
That is why this month we are revisiting which US stocks have the worst Quality Rankings. What has a terrible 5 year average ROE, high net debt/equity and poor earnings growth?
What are the sectors and the themes?
Anti-QARV
What do you see?
Casinos, Cruise Ships, Airlines, Real Estate, Oilfield Services, Commercial Aerospace.
All sectors everyone hates.
All sectors which went into COVID with a lot of debt and have been struggling with higher interest rates ever since.
Below are links to:
Rankings Sheet with full rankings on over 3000 stocks.
The Retool QARV data app.
And of course this is not financial advice and most of the time its better to buy high quality stocks.