Buy these 8 stocks now before a 'pain trade' to the upside catches investors off-guard, says a top-2% fund manager

  • The consensus in markets is wrong, and stocks are set for a big rally, says John Forlines.
  • A recession may come, but there’s still too much fear, the top-2% fund manager said.
  • Here are eight quality stocks picked by the model for Forlines’ yield-focused ETF.

Markets have a way of fooling as many people as possible — a phenomenon known as a “pain trade.” That’s why John Forlines, the chief investment officer at Donoghue Forlines, is getting bullish while so many of his counterparts are running for the hills.

“I think the pain trade between now and the end of the year is going to be in the upward direction, not the downward direction,” Forlines said in a recent interview with Insider. “So everybody is poised for the downward direction, because that’s just the way humans are. And I think that’s going to be the story of this market.”

As ugly as this year has been for so many investors, it’s been anything but painful for Forlines. In fact, his fund, the Donoghue Forlines Yield Enhanced Real Asset ETF (DFRA), is in the top 2% of its category this year, according to Morningstar.

Forlines shared his updated stock market outlook after the Federal Reserve raised interest rates again, as well as his top investing ideas right now.

The bull case in a bear market

At first glance, it’s hard to find a good reason to be bullish about stocks. Both earnings and stock valuations are set to decline, inflation has shown few signs of slowing down, and higher rates may end up strangling the economy and causing a recession.

But the fact that it’s so easy to be pessimistic is actually a contrarian reason to be bullish, Forlines said. While the Fed’s war on inflation hurts stocks, investors have known for weeks that hawkish monetary policies are the new normal, so much of that news is already priced in. 

“They’ve already taken a whole bunch of air out of the market,” Forlines said of the Fed.

And even if the Fed’s ultra-aggressive interest rate hikes send the economy into a downturn, that will almost certainly give investors a great buying opportunity, Forlines said.

“The best time to buy equities is in the heart of a recession,” Forlines said. “That’s when everybody’s given up.”

Look for quality and yield — not splashy tech

Any investor who’s beating 98% of their peers must be doing something right.

Back in April Forlines told Insider that his inflation-focused fund targets “real assets that can also produce yield,” which means prioritizing high free cash flow, quality earnings, and solid dividend yields. But that’s still a relatively broad description that many stocks fit into.

Instead of sorting through all the possible stocks with those attributes, Forlines said he runs a screen of Russell 3000 names to decide which companies make the cut. 

In addition to quality and yield, most of the picks have some relationship to infrastructure, Forlines said, whether they’re in construction, real estate, or energy.

“It’s also a play on the fact that the US is building behind the scenes,” Forlines said. “There’s a big private partnership with the public money that’s come in, and there’ll be more of it to rebuild bridges and tunnels and internet infrastructure.”

Forlines added: “Those kinds of opportunities tend to pay higher yields.”

Conversely, stocks that Forlines’ fund avoids include high-valuation stocks that lack liquidity. Instead, he prefers dividend-paying tech stocks like Apple (AAPL) and Microsoft (MSFT).

“As people get more confidence, they’re not going back into what I call the ‘ARKK type’ stocks,” Forlines said. “These things are really illiquid and emerging — maybe good someday, but they’re not going to go to those. They’re going to go back into bigger tech.”

8 top stocks to buy

The number of holdings in the Donoghue Forlines Yield Enhanced Real Asset ETF range anywhere from 50 to the upper-80s at any given time, Forlines said. It rebalances once a month and reconstitutes — or runs the entire screen again — once a quarter to ensure that current holdings are still a good fit in the fund.

Forlines honed in on eight top holdings that his fund’s model has identified right now. He first highlighted a quartet of oil supermajors: Shell (SHEL), BP (BP), ConocoPhillips (COP), and TotalEnergies SE (TTE). The former three have dividend yields of between 4% and 5%, while TotalEnergies has a dividend of 5.76%.

“They’re big dividend payers,” Forlines said of those four oil stocks. “They’re in a pretty ideal position because those big companies can decide to jump in and provide more capacity if they want to. So for example, the smaller drillers — and there’s a lot of smaller drillers in the United States — they just aren’t as fast, and they don’t have the cash to deploy when you need to fill capacity.”

The European oil crisisspecifically in Germany — provides a huge opportunity for Total to step up and provide energy, Forlines added.

“They’re going to benefit from Germany’s problems,” Forlines said of Total. “They’re probably the largest integrated main European continent oil firm. They would be in the same category with BP and Conoco and Exxon. And Total has supply agreements all up and down places where there’s liable to be some disruption this year because of the Russian decision to cut off oil and gas from everybody. So again, that’s another one that’s pretty well-positioned.”

Meanwhile, Enterprise Products Partners LP (EPD) is a master limited partnership that’s a high-yielding pipeline company. Its fundamentals are solid, and its 8% dividend looks attractive.

“Transport’s doing fine,” Forlines said. “Transport’s going to do even better because that sector will be one of the few areas that is going to be able to raise capital — even in the recession — because the demand for what they do is going to be great.”

A pair of resources companies — Linde PLC (LIN) and BHP Group (BHP) — also made the cut. Metals like lithium and nickel that are used in batteries and semiconductors are highly valuable, in Forlines’ view. While Linde provides investors with a dividend yield of 1.69%, BHP has a gargantuan dividend yield of 13.4%.

Lastly, Equinor (EQNR) is an energy production and transportation company that’s diversified with infrastructure projects as well, Forlines said. Unlike some of its peers, it hasn’t been hurt by the dollar’s massive rally this year, and its dividend yield is over 4% right now.

Leave a Reply

Your email address will not be published. Required fields are marked *