Don’t fear the Fed: A top-ranked fund manager shares her strategy for profiting from companies set to still deliver stronger-than-expected earnings — including 7 stocks she’s bullish on

• When it comes to tech investing, Nancy Tengler looks for companies taking advantage of digitization.
• In a tight labor market, it’s a signal that a company can improve productivity.
• These names she’s bullish on, including Home Depot, must have strong balance sheets and cash flow.

According to the Fear and Greed Index, the stock market is in “fear” territory.

Investors’ concerns about persistent inflation and higher-for-longer interest rates have caused the market to fall. The Nasdaq Composite has given up some of its year-to-date gains, falling 4.33% in the last month. For the same time period, the S&P 500 is down 3.33%.

However, there has been too much focus on the Federal Reserve and the dot plot of interest-rate expectations, according to Nancy Tengler, CEO and CIO of Laffer Tengler Investments, which manages nearly $400 million in assets. Her firm was named to the PSN Top Guns List of best-performing managed accounts, managed ETF strategies, and separate accounts in the second quarter.

Tengler’s investment strategy favors long-term trends and strong companies over short-term market fluctuations or what Fed Chairman Jerome Powell says in his latest press conference.

“I think, as an industry, we put way too much emphasis on the short-term statements of the Fed and of management,” Tengler stated. “What we should be doing is keeping an eye on the economy and really understanding what to expect from it.” We believe it is slowing. As a result, we prefer to invest in companies that have consistent earnings growth.”

She is, however, upbeat about the economy’s near-term prospects. She anticipates that earnings and margins will be higher than expected in the fourth quarter of 2023, but warns investors to be wary of companies that aren’t generating earnings. She also believes that the consumer-staples industry is overvalued. Overall, she expects companies with strong balance sheets to breeze through the fourth quarter.

“I think that the consumer is stronger than the market appreciates, and that’s not based on the excess savings argument or the fact that they’re paying student debt, but it’s based on the fact that the net worth of the average consumer in the US is well above pre-pandemic levels,” she stated.

She noted that the stock market was more volatile and the outlook was slightly more negative at this time last year. Rising interest rates were steering investors away from technology and toward value. But Tengler was undeterred.

She told Insider that her company continued to add to existing and new positions in tech names, a strategy she still employs. While Tengler’s firm has since made some profits, the companies she purchased a year ago remain among her portfolio’s largest holdings.

But she isn’t always placing popular technology bets, such as those on the magnificent-seven stocks Meta and Nvidia. Instead, she’s interested in identifying companies from a variety of industries that are embracing digitization to boost productivity in a labor market where job openings outnumber available workers.

Storage companies, for example, that allow customers to access their facilities via an app without ever interacting with a person would be considered a company that embraces digitization and, as a result, a leader in its sector. Tengler claims that 50% of Public Storage (PSA) customers use an app to access their unit.

These companies’ balance sheets should also be strong, as evidenced by free cash flow, debt-to-equity, net-debt-to-EBITDA, price-to-earnings ratios, and adjusted operating margins. She also considers three qualitative factors that should be strong: the management team, a company’s industry dominance, and its growth catalyst.

Other companies at the forefront of digitization include Home Depot (HD), which has seen a significant increase in e-commerce sales, Chipotle (CMG), which has seen a significant increase in digital sales through its app, and Honeywell (HON), which is digitizing manufacturing plants.

“In a tight labor market historically, technology spending goes up and technology stocks outperformed,” Tengler stated. “Why? Because you need to increase your productivity. And these are the businesses that are increasing economic productivity.”

According to the Bureau of Labor Statistics, there were 8.8 million unfilled jobs in July.

There is still a sizable portion of the population that is not working. And this, she says, creates an environment in which businesses compete for and hoard labor.

Tengler invests in pure technology stocks that have strong balance sheets. Broadcom (AVGO), Palo Alto Networks (PANW), and Microsoft (MSFT) are among the companies where she has held positions. She is confident that these companies will be able to deliver strong earnings growth despite the slowing economy.