A Change in Market Regime Means These Stocks Will Soar

We often see two kinds of stocks in the market: growth and value.

Growth stories usually make the headlines. But sometimes, the stars align for value stocks, some of our favorite ways to invest, to come out on top.

There are certain indicators that show which one is primed for success… if you know where to look.

Every once in a generation or two, the market creates a new wealth-building opportunity as the winners are replaced.

And right now, the data says we are beginning another brand-new decade-long market cycle… One where value stocks have the potential to deliver triple-digit returns in the next few years.

As Chief Analyst Adam Galas will lay out in this month’s issue, that means today might be the best time in the next 20 years to buy some of our favorite Fortress picks.

He’ll lay out our top three highest-conviction picks to play this upcoming market. All while prioritizing safety in all market conditions.

Happy SWAN (sleep well at night) investing,

Brad Thomas Editor, Fortress Portfolio

By Adam Galas

We’re on the cusp of a pivot point in the market.

When it happens, the reigning winners of the last decade or so will fall. And in their place, a different asset will arise.

This cycle has been in place for over a century. And we can trace its origins back to the roaring ’20s…

Back then, Radio Corporation of America (RCA) was the ultimate Wall Street darling.

That’s understandable… Radio sales went from $60 million to $843 million, a 1,300% increase in just six years.

RCA’s profits also increased almost 10x from 1925 to 1928… But its stock was the hottest of all.

In 1922, you could buy 1,000 RCA shares for $1,500. By 1928, that was worth $549,000. In today’s money, that would be $9.8 million.

Radio was the future. And everyone wanted a piece.

RCA was like Tesla or NVIDIA today – a compelling growth stock that only looked like it could go up.

Growth stocks tend to trade at prices higher relative to their book value. But people are willing to pay the premium for the future opportunity they represent.

And when it came to a big, transformative trend like radio, all eyes were on the future.

But the good times didn’t last forever…

On October 29, 1929, the Great Bull Market ended on Black Tuesday. The stock market crashed, and investors lost around $40 billion in value.

This ushered in the Great Depression, which lasted 10 years.

You don’t need me to remind you how devastating this period was… But when we emerged, a shift in opportunity took place.

You see, it wasn’t growth stocks that took center stage again. It was value.

And for the next few years, value stocks outperformed growth stocks.

(Source: O’Shaughnessy Asset Management)

From 1926 to 1941, growth stocks outperformed value by about 5% per year for 15 years.

But look at what happened after that. For the next 65 years, value stocks crushed growth by 6% per year, generating 47X better returns for investors.

Today, we’re at another tipping point. This change in regimes only happens every few decades. And based on the economic and market factors converging right now… we’re due for a shift.

Rather than radio, today’s growth stocks are powered by artificial intelligence, electric vehicles, and other tech.

But they’re headed toward the end of their cycle.

And value stocks – like the blue-chip dividend payers we target at Fortress Portfolio – will emerge as the next winners.

The last 14 years of record low interest rates and the rise of big tech have felt a lot like the 15 years starting during the roaring 1920s.

Now, we’re not market timers. So how can I be so certain?

Because we follow fundamentals. And we can compile the average returns of what happens to value stocks in different phases of the economy.

(Source: Vanguard)

This table shows that when value stocks are extremely cheap relative to growth, the best time to buy them is right as the economy is starting to weaken. It’s even better than waiting for the recession to end.

And this historic opportunity is not in a few months; it’s now. In fact, the exact date my research revealed is September 16. So we’re right on time to take advantage.

In today’s issue, I’ll share the proof I’ve uncovered that tells me this shift is coming… And how it’s signaling that this could be the best time to buy the best high-yield dividend blue-chips for the next 10 to 20 years.

Then, I won’t just offer you one recommendation… I’ll lay out three opportunities within our Fortress Portfolio.

These are the most undervalued right now… And based on my research, they have the potential to maximize your returns in the value mega-rally about to begin.

The last time these three picks were this undervalued, they returned triple- and even quadruple-digit gains in less than 10 years.

That’s the opportunity we have today.

As I mentioned, the best time to buy value stocks is right as the economy is slowing down.

And I know that time is now because I watch economic data religiously and can put it in context of economic history.

Here’s where we are now…

The highest inflation in 42 years triggered the Fed to hike at the fastest rate in four decades. This is what caused the great tech crash of 2022.

Economists had been predicting a recession at the start of 2023, but the economy has boomed.

But there’s one group that hasn’t been fooled. The bond market, AKA the “smart money” on Wall Street.

Since October 2022, the bond market has been predicting with 100% confidence that a recession would start between June 30, 2023, and July 31, 2024. That’s exactly what our economic model has been saying for over a year.

The most accurate recession-prediction engine in history is saying we are correct and the downturn is coming, just later than expected.

The bond market was smart enough to recognize that record government stimulus checks would take a long time to be spent down.

Before consumers had to start pulling back on spending, that was the key to understanding the likely timing of this recession. And thus, the potential beginning of the next great decade-long value rally.

70% of U.S. GDP is driven by consumer spending. If you can pinpoint when that peaks, you have a good chance of understanding when the next recession begins. And, thus, when the next great value mega-rally begins.

Since 1967, the average time it has taken for consumer spending to peak after the Fed began hiking rates was 18 months in a rate-hiking cycle.

In this cycle, that first hike was March 16, 2022. And 18 months after that was September 16, 2023.

On average, consumer spending declines for the next 20 months, though the worst of the recession occurs around 12 to 13 months after the peak.

That would point to a recession most likely beginning around June or July 2024, the tail end of our expected recession start range. And also what the bond market has been saying since October 2022.

So to get ahead of the best historic buying period for our favorite value stocks, our short window is open.

To illustrate the opportunity we have today, let me highlight another period where growth-oriented tech stocks were all the rage.

In the 1990s, tech was booming. Value fell 50% while the Nasdaq tripled. “To hell with value and dividends; all hail growth forever!” seemed the order of the day.

And then this happened.

(Source: Portfolio Visualizer Premium)

Here are the opportunities you could find at this last mega-inflection point using three of our current recommendations as examples.

And here’s what happened next when the value vs. growth cycle switched to favor value with an initial investment of $1,000…

(Source: Portfolio Visualizer Premium)

As I showed in the Value and Growth Regimes table above, we’ve been through three cycles since the tech bubble burst.

Yet you can see that by seizing the opportunity in 2000, investors achieved far superior returns and rivers of dividends.

And now, thanks to changes in consumer spending and the Fed raising interest rates… This history lesson is likely to happen again.So let’s make sure we’re ready and own the shares of the next cycle’s winners.

Value stocks, including most dividend stocks, are the best long-term strategy to grow your income and wealth.

Of course, no strategy is successful 100% of the time. So it follows that they have down years. Luckily for us, these down years are buying opportunities.

Which is what we have now.

Usually, the best time to buy value is after a recession. That’s the only time value tends to outperform growth… Except after a long bear market in which value is dirt cheap and insanely undervalued.

Then, the best time to buy value is right as the economy is slowing down. After which, it’s historically outperformed growth by 5% annually.

In the coming months, as the economic data starts to weaken and confirms that history is once more rhyming or even repeating itself… value stocks are likely to rocket higher, becoming the stars of Wall Street.

And at Fortress Portfolio, we’ll be ready.

Our three favorite Fortress names to buy at a discount today are between 30% and 40% undervalued.

These kinds of discounts are incredibly rare with the blue-chip dividend stocks we look at.

When you buy the world’s best ultra-yield blue chips at 30% to 40% discounts, you can lock in safe 5% to 8% yields from companies growing 8% to 10%, as all of these are.

That gives you the potential to triple your money in three years, sometimes less.

So let me tell you their names and show you how you can position yourself to profit from the coming value mega-rally.

US Bancorp (USB) was founded in 1929, during the start of the Depression.

Where 9,000 of its peers failed, US Bancorp was able to gobble them up and grow into America’s largest super-regional bank. Today, US Bancorp is the fifth-largest bank in America.

USB does everything a traditional bank does. And it does one better by avoiding investment banking, which is more speculative and volatile.

After the Fed’s latest stress test results, S&P did a deep dive on USB’s balance sheet and rated it “A, stable” and deposits “A+, stable.”

That means USB has a 0.66% risk of failing in the next 30 years. And a 0.6% risk of experiencing a bank run like First Republic or Silicon Valley bank.

US Bancorp sailed through the Fed’s 2023 stress test and is rebuilding its capital within a year after its December 2022 Union Bank acquisition. This will help it hit new higher capital requirements the Fed plans to require for regional banks.

USB’s stock price is under pressure because the market worries that rising rates and a 2024 recession might hurt bank profitability, along with those higher capital requirements.

USB trades 9 times earnings today. That’s the same as its five bear market lows of the last 20 years.

It has averaged 13 to 14 times earnings for 20 years. And our research shows there is a 91% chance it will return to those historical market-determined fair value price-to-earnings (P/E) ratios.

And here is the thing that Wall Street is missing: US Bancorp’s profitability has been improving as rates have been rising.

That’s because it can raise interest rates on customers faster than its own funding costs are increasing.

Before interest rates began rising, analysts expected USB’s earnings to grow 8% per year over time. Now, it’s still 8% even with the Fed planning on raising capital requirements for all large banks.

Higher rates for longer and the end of free money is a boon for banks. And it should allow USB to deliver Nasdaq-beating long-term returns from here.

This means that fear, uncertainty, doubt, and even recession are already largely priced into US Bancorp’s price.

We have limited downside and massive upside thanks to this deep-value opportunity in the Fortress portfolio.

Here’s what happened the last time US Bancorp was this undervalued…

(Source: Portfolio Visualizer Premium)

And we have a similar return potential today, created by exceptional value, safe yield, and industry-leading growth. If US Bancorp grows as we and analysts expect and returns to historical fair value, we could see these gains by the end of:

But wait, it gets better. US Bancorp doesn’t just offer the potential for tripling your money in a few years… It also has the potential to lock in a very safe 5.3% yield today and turn $1 into $5.32 in a decade.

Fundamental Summary

Action to Take: Buy shares of US Bancorp (USB) Buy-up-to Price: $58.24 Position Sizing: 4.4% of your Fortress Portfolio. Or up to 15% in an individual portfolio.Risk Management: 30% hard stop loss ($25.20 for our tracking purposes)

You’ve probably never heard of Manulife (MFC)… But it’s Canada’s third-largest insurance company and a market survivor since its founding in 1887.

It’s come through:

Manulife hasn’t always come through every crisis smelling like roses, though.

For example, it took on many dangerous junk mortgage derivative products before the Great Recession. When the U.S. toxic mortgage market imploded, Manulife suffered an 88% decline in earnings.

However, the fact that it remained profitable during the crisis was impressive. For comparison, AIG, the largest U.S. insurance company, saw its earnings fall from $99 per share in 2006 to -$334 per share in 2008.

AIG lost $380 per share from 2008 to 2010, while Manulife made $0.84 in profit.

Unlike that horror show, the secret to Manulife surviving the Great Recession without bail was stricter financial regulations in Canada.

There’s also a more conservative culture at Manulife when it comes to investments. Yes, it owned some toxic mortgage-based assets, but it made sure to have much larger capital buffers to offset them.

That’s why Canada’s banks and insurance companies remained profitable while U.S. ones suffered losses equal to decades of profits in a single year.

Next, let’s take a look at its rating and balance sheet…

(Source: S&P, Fitch, Morningstar, AMBest)

Today, Manulife has a pristine balance sheet loaded with risk-free government bonds, A-rated corporate bonds, and some high-quality real estate assets.

There isn’t a single toxic derivative in sight, which is why no less than four rating agencies estimate a 1% chance Manulife will fail in the next 30 years.

For further proof that Manulife has cleaned up its act and its balance sheet, consider this… During the Pandemic, when tens of thousands of customers made life insurance claims, Manulife’s earnings fell just 7%.

And the following year, it has an 18% recovery.

But Manulife’s story is about a lot more than learning from and not repeating past mistakes. It’s about building a future around asset management and Asia.

Management thinks it can achieve 10% to 12% long-term growth. And both my model and the 16-analyst consensus covering this company believe 10% is a reasonable growth rate.

There are two main reasons for such industry-leading growth. First, Manulife is not the highest-margin Canadian Insurer. That’s actually working in its favor because it has more room for improvement.

Manulife plans to achieve better margins by spreading out its fixed costs over more business. That’s where its improved business focus is.

It’s steadily minimizing the long-term care insurance policies (nursing homes) that have been a drag on the entire industry for over a decade. By 2025, it expects these policies will account for less than 10% of sales.

Instead, it’s focused on asset management, particularly in Asia, where it’s proven very good at managing money for rich people.

Manulife is the most ambitious of Canada’s insurance companies in terms of expanding into Asia. While there are risks with such a strategy, Manulife has proven very good at managing them so far.

S&P rates it in the 81st percentile on long-term risk management, based on over 1,000 metrics. And that’s among all the companies on earth.

This low-risk, A-rated company yields almost 6% and is growing at 10%. Yet its P/E ratio is less than 8. This means it’s priced for about -1.5% long-term growth.

Now that the end of free money is likely over, higher interest rates for longer is beautiful for financial companies.

But there is perhaps no industry on earth that benefits more from higher rates. Insurance companies invest their float – the policy payments that haven’t been paid out yet – into mostly risk-free bonds.

Their funding costs are zero. And every bit of extra interest income they earn from those higher bond rates drops straight to the bottom line.

So with Manulife, you have an Asia growth story, a rising rate benefit story, and an anti-bubble deep value story.

Here’s what happened the last time Manulife was this undervalued…

(Source: Portfolio Visualizer Premium)

And in the coming years, here are the kind of returns we can expect from Manulife if it grows as we analysts expect…

Fundamental Summary

The current best available data indicates that if you buy $1,000 worth of Manulife today, within 10 years, you could have almost $6,000 and enjoy $1,500 per year in dividends.

That’s a 5.8% yield today that will likely be around 15% on today’s stock price in a decade.

Action to Take: Buy shares of Manulife Financial (MFC) Buy-up-to Price: $26.80 Position Sizing: 4.4% of your Fortress Portfolio. Or up to 7.5% in an individual portfolio.Risk Management: 30% hard stop loss ($20.44 for our tracking purposes)

Legal & General (LGGNY) is a UK-focused English asset manager and a former insurance company.

Let’s start by examining its risk, balance sheet, and credit rating…

(Source: S&P, Fitch, Morningstar, AMBest)

As you can see, Legal & General is an A-rated company with rock-solid risk management.

Remember how Manulife’s risk management policies are now so solid that S&P considers it in the top 19% of all companies on earth? Legal & General is right up there in the top 21% percentile at managing its risk.

That’s why even when UK bonds collapsed in September 2022 and threatened the entire British Pension system with collapse… Legal & General, a significant pension provider, was unaffected.

Better yet, the same high inflation that has besieged the UK for years, including inflation as high as 22%, has benefited Legal & General.

That’s because it’s one of the country’s most trusted private pension providers. It also manages portfolios for wealthy clients. That means it has to be very conservative with its bond portfolio, focusing primarily on risk-free government bonds.

In Germany, 10-year bonds yield 2.6. In the U.S., 4.1%. But in the UK, they yield 4.4%.

Legal & General has a plan for diversifying into the US, which it’s already doing with success. It’s also planning to move into Asia, much like Manulife.

But in the meantime, its UK-dominated business benefits from the highest interest rates in the developed world, which has boosted its growth outlook to almost 9% long-term.

Its 8.3% yield and almost 9% growth are outstanding – and they don’t sacrifice safety. Other safe assets like REITs today yield 4.6% and utilities 3.3%.

And you can get this all from an A-rated financial that’s survived 136 years, adapting to all kinds of risks and unexpected challenges.

That’s a 17% return potential if you buy Legal & General at fair value. But today, Legal & General is trading at 10 times earnings, a 30% historical discount.

Here’s what happened the last time Legal & General was this undervalued…

(Source: Portfolio Visualizer Premium)

And if it grows as expected, here is the return potential we have with Legal & General:

Fundamental Summary

Action to Take: Buy shares of Legal & General (LGGNY)Buy-up-to Price: $19.53Position Sizing: 4.4% of your Fortress Portfolio. Or up to 7.5% in an individual portfolio.Risk Management: 30% hard stop loss ($25.79 for our tracking purposes)

In this issue, I’ve presented the three most undervalued Fortress blue chips. These are the most coiled springs in our coiled spring portfolio.

While there are no certainties on Wall Street, the stars have aligned for a once-in-a-generation opportunity for income investors.

You can lock in 5% to 9% safe yields from companies growing up to 12% per year and buy them at anti-bubble valuations.

With the stage set for what might be one of the biggest mega-rallies in value history, the risks are relatively low, given the quality of the companies we hold.

But there are ways our short-term thesis could prove wrong.

The most significant risk is that the recession will trigger the knee-jerk reaction that growth investors are accustomed to in the low-rate era. If we get a recession and rates fall, even though growth is still overvalued, it might temporarily pop higher.

Momentum investors then pile in and keep the growth vs. value bubble growing for some time.

During the tech bubble, value became 40% undervalued vs. growth, and the discount stayed steep for another two years.

The good news is that the bigger the extremes in valuation, the bigger the ultimate reward.

But it’s important to remember why market cycles keep happening and always will.

Bubbles, bear markets, and even recessions are created by humans, forgetting the lessons they have learned at significant cost. “This time is different” is something all speculators say to justify why the recent past will continue forever.

I call it the gambler’s prayer, and it’s not a great investment strategy for everyone. Often, the bettor doesn’t even have a reason that “this time is different.” They hope and pray it is, somehow, because the trend has been their friend for so long.

At Fortress, we don’t roll that way. We don’t recommend you risk your hard-earned savings based on hopes and prayers. We’re disciplined financial scientists, always following the best available facts and evidence wherever it leads.

That is the essence of disciplined financial science – the math behind getting rich and staying rich on Wall Street.

If the facts change, we’ll let you know. We carefully monitor these and hundreds of other companies to ensure you always get our best ideas, advice, and the best ultra-yield opportunities.

Are we worried about the 2024 recession? Not particularly, because our blue chips and sleep-well-at-night (SWAN) companies have been battle-tested through two of the worst economic catastrophes in history.

2024’s recession is likely mild. But if one of our Fortress companies falters, we’ll see it and let you know.

The U.S. economy has proven far more resilient than economists and even I expected. That’s fantastic news for workers and Main Street in general.

But it’s also a problem for the Fed because inflation is proving stickier than expected.

Services are 65% of the economy, and wages are the #1 service cost. Thanks to the pandemic triggering record stimulus and far less immigration, we have the tightest job market in 54 years.

That means that companies have been “labor hoarding,” cutting back on hours and hiring as many workers as they can get just because there are so few of them available.

This has slowed in recent months as more people reenter the workforce. Wage pressure is falling, with a few exceptions, like unionized auto workers asking for $300,000 per year in pay as part of their strike.

Unfortunately, due to how the government measures inflation, it’s expected to keep rising for at least a few months.

There is also the issue of gasoline prices rising to around $4, helping to push up headline inflation even more.

While the Fed ignores gasoline prices, consumers don’t. And if inflation expectations start to rise, then the Fed will have to keep raising rates, no matter what it does to the economy and job market.

What is actual inflation doing? We have a way of monitoring all inflation based on 10 million data points updated daily. And on July 19, real inflation bottomed at 2.08% and has been rising steadily since to 2.7%.

Given the Fed’s 2% goal and inflation moving in the wrong direction, the bond market thinks it’s about a 50/50 coin toss whether the Fed hikes one more time in November before pausing.

But whether or not the Fed is done hiking matters a lot less than how quickly the Fed cuts rates. Don’t forget the Fed is reverse money printing at a rate of almost $100 billion per month.

So is the U.S. Treasury through historic bond sales.

So, the money supply is falling at a historic rate.

A recession hasn’t started yet because of the historic pandemic stimulus that flooded the economy with $2 trillion to $4 trillion in extra cash.

But by year’s end, higher prices are expected to have eliminated all excess savings according to most economists. And that means consumer spending, which has already started to show signs of peaking, is likely to start reversing right on schedule.

The Fed only has to hold rates steady for falling money supply to weaken the economy and cause a recession.

Since the Fed caused nine of the last 12 recessions, it’s not hard to see why the bond market has been 100% confident of a recession starting by July 31, 2024, since October 2022.

Could this be the first time in history where inflation started over 5%, and the Fed was able to bring it under control without a recession? While unprecedented, it’s not impossible.

Record $9 trillion in total government stimulus could certainly make this the first time. But for that to really happen, we’d have to avoid a recession through the end of 2024.

And given the cracks already starting to show in the economy and the Fed’s plan to keep sucking money out of the economy until June 2025… I would say the most likely scenario is a mild recession beginning around July, lasting 6 months, with the market historically bottoming about halfway through the recession.

That would be about September or October 2024. In October, 37% of bear markets end (bottom), so an educated guess based on the current data says the S&P bottoms around Friday, October 18 (options expiration day), 2024, at about 3,400, or 25% below current levels.

(Source: FactSet, Bloomberg)

Remember that historically, the most undervalued companies outperform the most, starting right now, even going into a recession. That’s due to valuation extremes only seen three times in history.

And as we’ve done in today’s issue, we’ll help you set yourself up to take advantage of them.

Altria (MO) increased its dividend by 4.4% dividend hike (exactly as expected). That makes it the company’s 54th consecutive annual dividend increase.

(Source: Gurufocus Premium)

I welcome your questions and will try to answer as many as I can in the weekly update videos and these monthly newsletters.

Just remember, I can’t give individual investment advice. But I can supply information and general guidance for the average investor. Write in with your questions here.

Safe investing,

Adam Galas Chief analyst, Fortress Portfolio