Tuesday was a pretty rocky day of trading for markets, and just like that, calls of market corrections, pullbacks, crashes, and all that sort are back in the headlines. Undoubtedly, many market strategists have been doubting the recent run all the way up. But the main aura on the Street has not been euphoria. It’s been cautious bullishness.
With Dr. Michael Burry, the legendary investor made famous from The Big Short, recently betting against Cathie Wood’s ARK Innovation Fund — a fund that’s chock-full of high-multiple hyper-growth stocks — it certainly seems like the bears are poised to come out of hibernation. Burry is usually right on the money, and I certainly would not want to be on the other side of his trades.
Dr. Michael Burry bets against hyper-growth tech—don’t panic
Dr. Burry also seems to be calling for higher yields on U.S. Treasury notes. Indeed, if rates do trend higher, we could be in for a second round of an isolated tech-focused selling we witnessed in the first half of 2021. In any case, investors would be wise to pay merit to Burry’s moves. After all, he has proven time and time again that he’s the voice of reason in pretty unreasonable and borderline euphoric markets.
That said, I wouldn’t get too bearish by hoarding cash amid rising inflation. By overweighting in cash, you’ll stand to take a bigger hit to the chin if the much-anticipated correction never arrives when you think it will. If investors anticipate a correction in September or October, it would just correct right now. While there is a bearish tone in markets today over the delta variant, heightened valuations (especially in hyper-growth stocks), and the prospect of rate hikes, I think it’s still wise to spread your bets by staying invested despite the long list of worries.
Personally, I have no idea if rates will ascend in a way such that high-growth stocks come tumbling down again. While I wouldn’t ride on Dr. Burry’s coattails into his latest trade, I would take it as a hint that areas of the market where he’s short are at high risk of downside. Or, at the very least, the risk/reward in such areas isn’t great.
Undoubtedly, investors have shown an increased willingness to speculate on unprofitable growth companies. While many firms will grow into their high multiples in due time, there is a chunk that may not. In any case, both could be at risk should rates climb again, and Dr. Burry who will look like a genius for having acted as a contrarian at a time that he’d look foolish (that’s a lower-case “f”) for doing so.
Time to play it defensively like a cautious bull with TSX dividend stocks?
Most Fools aren’t comfortable buying puts on Cathie Wood’s ARKK. Options aren’t everybody’s cup of tea. I would, however, take Burry’s recent moves as a sign that it may be wise to rotate into value names, rather than chasing today’s high-momentum, high-multiple tech stocks.
Fortis (TSX:FTS)(NYSE:FTS) strikes me as a relative underperformer that could be in a position to make up for lost time moving forward. If you’ve got an extra $1,000 sitting around in your Tax-Free Savings Account (TFSA) just waiting to be invested, I think it makes a tonne of sense to buy a defensive bond proxy like Fortis right now. The valuation is modest, and shares are likely to continue trending higher, regardless of whatever bumps in the road are up ahead.
If Dr. Burry is right and tech looks to take a spill, I expect the broader markets may not even fall by 10%. Indeed, rolling corrections have been quite prominent this year. With a name like Fortis, you’ll improve your odds of obtaining a green arrow, as overvalued plays look to finally correct.
Even if markets continue trending higher, led by high-multiple growth stocks, Fortis is still likely to continue climbing higher amid its newfound momentum.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette owns shares of FORTIS INC. The Motley Fool recommends FORTIS INC.