To guide the future of the stock market and the economy, experts from Osterweis Capital Management, such as Carl Kaufman and Nal Farhi, analyze financial data with the precision of accountants, focusing on debt and dividends.
According to Morningstar Direct, their funds, the Osterweis Strategic Income Fund (OSTIX) and the Osterweis Growth & Income Fund (OSTVX), have significantly outperformed their competitors and benchmarks in recent years.
Here are six important insights and forecasts from Kaufman and Farhi about the current market environment in the United States:
No immediate recession
Despite forecasts by analysts like Jeffrey Gundlach, Kaufman and Farhi do not predict an immediate recession in the United States. They explain this by pointing to the tendency for government measures to support growth in an election year and note that current market conditions, such as the small spread between high-yield corporate and government debt, do not indicate a recession. “Our main scenario is a slowdown, not a recession,” Kaufman asserts.
Creating cash reserves
Given market conditions that could lead to future downturns, Kaufman’s funds maintain high levels of cash. “We are in the last three innings of the high-yield bond rally,” Kaufman warns, suggesting that preparing for a market downturn is reasonable considering the current low yield on riskier debt.
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Focus on lower-quality bonds for better returns
Kaufman finds opportunities in bonds rated “BB” or “B” that offer higher yields than bonds rated “A” despite similar or better credit metrics. His fund holds debt from companies like KeHE Distributors and Banijay Group, which have stable financial metrics and growth potential.
Invest in companies that reinvest free cash flows
Kaufman and Farhi prefer companies that reinvest their earnings into growth rather than excessive share buybacks or dividends. For example, they favor Airbus due to its long-term investments in fuel-efficient technologies over competitors like Boeing.
