Paul Meeks: Trump rally to fade, reduce exposure; selling bank and drug stocks

Published Fri, Nov 11 20162:48 PM ESTUpdated Fri, Nov 11 20163:10 PM EST

I've trimmed positions in two stocks in my " Squawk Box" Platinum Portfolio . In the past two days, I sold half of my positions in Signature Bank and Pacira Pharmaceuticals . The reason is simple: both stocks have rallied in the past two days along with the market, and I don't think the gains are sustainable. I personally don't care if this is a Trump bounce or not. The headwinds facing banks (Signature) and pharmaceuticals (Pacira) won't ease soon. As a result, the risk-reward profile points to overvalued and oversold territory. The market is in the midst of a particularly volatile period. And although I don't fancy myself as a trader, I am a contrarian investor who has done well in 2016 by playing the extremes over short periods. I've worked on Wall Street for nearly three decades. From my experience, the postelection euphoria, particularly in the financial sector, might have led investors to rush into buying these stocks. But given the recent rally, they may be late to the party. The reality is that Dodd-Frank isn't likely to be repealed, or at least not anytime soon. And while rates may begin to rise as soon as next month, there'll still be net interest margin pressure on those living off the spread as it goes from the floor to only an inch above it. When I worked for Merrill Lynch, the company's stated goal was to reach a 20 percent return on equity (ROE). The other major investment banks had the same objective. However, in 2016 none of these firms have the business mix to achieve that figure. Maybe a 10 percent ROE is the new norm. But even that level of profitability may be a stretch currently and prospectively. In the past 12 months, for example, the ROE for Goldman Sachs , Morgan Stanley and Bank of America ranged between 6 and 7 percent. The forward price-earnings ratios for these stocks is between 11 and 14 times. These are ample valuations given the sector's secular shift. Investors may be playing with fire by owning these stocks, in my opinion. President-elect Donald Trump has promised a scorched-earth agenda that matches his persona. Yes, he has a Republican House and Senate. But does anyone truly believe that there'll be the wholesale change in the drivers of, and the regulations, for financial companies in the next four to eight years that the market seems to reflect? As usual, the reality will fall between the extremes. I bet that banks will never return to their glory days pre-financial crisis. I think things will improve, but not that much. If you want to make money instead, I suggest you focus on tech companies, particular those in the cloud business. Similarly, I'm not surprised in the sector rotation that followed the election. Investors woke up on Wednesday to an "all clear path" for health-care stocks. However, I don't think that Obamacare will be repealed so soon and so easily as is the consensus opinion. Fundamentally, the worst sector in the S & P 500 prior to the election, health care, hasn't been resuscitated enough to make it the best since Trump won. Among the stocks I own for CNBC PRO's model portfolio , I got a double whammy with my bank (SBNY) and pharmaceutical (PCRX) trades. I bought them when they were at or near trough prices, partially because most people didn't want to touch them. They were oversold and undervalued. They were spring loaded because their news couldn't have been worse. So, with the postelection bounce in their respective sectors, whether or not they're justified (I think not), these names soared even more than their suddenly favored sectors. I sold into that nonsense. For now, I am leaving the proceeds in cash until I find my next contrarian buy. For that to happen, I'll have to see the market come back to reality. Paul Meeks, CFA, contributes to CNBC PRO and is a Platinum Portfolio manager on "Squawk Box." He's the chief investment officer and a separate accounts portfolio manager at Sloy, Dahl, & Holst (SD & H) in Portland, Oregon. SD & H manages approximately $1 billion. Meeks owns none of the stocks mentioned in this article p ersonally, or for clients .

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I personally don't care if this is a Trump bounce or not. The headwinds facing banks (Signature) and pharmaceuticals (Pacira) won't ease soon. As a result, the risk-reward profile points to overvalued and oversold territory.

The market is in the midst of a particularly volatile period. And although I don't fancy myself as a trader, I am a contrarian investor who has done well in 2016 by playing the extremes over short periods.