Fundstrat’s Tom Lee is still betting on cyclicals, sees some market overreaction in sell-off

Published Wed, Oct 28 20201:43 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

(This story is for CNBC Pro subscribers only.) Tom Lee of Fundstrat Global Advisors said Wednesday he still believes investors should position their portfolios toward cyclical stocks, despite rising concern over the intensity of the coronavirus pandemic . "It's a very tough spot, and we've been sticking with these things and it's been really painful, but I still think that's the right way to tilt," Lee said on "Halftime Report," as U.S. stock indexes fell sharply. Investors were grappling with an uptick in Covid-19 cases across the U.S., as well as in Europe, where leaders are weighing tougher restrictions on business to curb rising infection rates. After Lee spoke Wednesday, Germany announced that bars and restaurants have to close beginning Monday. Lee, founder and head of research at Fundstrat, said there are two main reasons underpinning his belief in sticking with the so-called epicenter stocks. The firm considers those names to be the ones hardest hit by the pandemic, such as airlines. The first is that America's increasing Covid-19 cases are mostly located in states that did not have significant outbreaks earlier in the pandemic, Lee said. He contended that states such as New York and Connecticut have so far seen a "benign" rise in infection. He said the second reason is that there are encouraging financial signs that should only be further aided by the upcoming resolution of the Nov. 3 presidential election. He said there have been 26 industries that have recorded flat, or even negative, revenue growth in the third quarter — yet they have seen positive earnings before interest, taxes, depreciation, and amortization (EBITDA). "So in a restricted top-line environment, they've been posting growth in EBITDA, which means once we get past this huge bump around Election Day and we get stimulus, the 2021 earnings outlook is going to look really strong for these cyclical stocks and as you get into November, people should be thinking about 2021," he said. Lee, who bet on a stock market rebound in March before many other Wall Street strategists, acknowledged there are risks to the epicenter stocks if the significant business restrictions get implemented again in the United States. However, as it relates to the broader market, Lee contended that fears of a crackdown on restaurants, for example, should not lead to a broad sell-off in equities. He repeatedly stressed that restaurant spending does not constitute a major portion of U.S. GDP. "The real thing driving this economic momentum is people buying homes. People being able to safely go to school, which has been true. People able to keep businesses open, which has been true," he said. "But there are certain activities that are not safe ... and those are the ones that are going to get hit, but for 40% or 50% of the S & P to take this hit, to me that's an overreaction."

Tom Lee, Fundstrat Global Advisors

Scott Mlyn | CNBC

(This story is for CNBC Pro subscribers only.)

Tom Lee of Fundstrat Global Advisors said Wednesday he still believes investors should position their portfolios toward cyclical stocks, despite rising concern over the intensity of the coronavirus pandemic.

"It's a very tough spot, and we've been sticking with these things and it's been really painful, but I still think that's the right way to tilt," Lee said on "Halftime Report," as U.S. stock indexes fell sharply.

Investors were grappling with an uptick in Covid-19 cases across the U.S., as well as in Europe, where leaders are weighing tougher restrictions on business to curb rising infection rates. After Lee spoke Wednesday, Germany announced that bars and restaurants have to close beginning Monday.