The Federal Reserve is in the midst of what is expected to be its most aggressive tightening cycle in more than 40 years as the central bank attempts to tame runaway inflation.
Gary Black, co-founder and managing partner of The Future Fund, gave investors some pointers on how to select growth stocks amid a rising-rates environment during a presentation on May 13 at the "2022 FinTwit Conference" hosted by Benzinga and Lupton Capital.
"If the Fed is going to take rates up, you've got to be willing to deal with the pain that comes with that and in my world as a growth stock investor, when rates go up, long-duration assets get crushed," Black said.
"As long as the Fed is willing to raise rates to put us into recession, if you want to make money investing, you really have to change your portfolio a little bit without losing your style."
What To Know: The same stocks that worked really well as interest rates fell aren't going to continue to work as interest rates climb higher, he said: "You've got to concentrate your highest conviction names."
Investors should consider rotating into the shorter-duration stocks that exhibit high growth but are profitable. Black noted that The Future Fund's largest position is Tesla Inc TSLA.
"Tesla is actually a more moderate-duration stock. It makes a lot of money and it's generating a lot of free cash flow," Black said.
The firm's second-largest position is Alphabet Inc GOOG GOOGL, which is followed closely by Celsius Holdings, Inc. CELH, he noted.
Celsius is a longer-duration stock, but the company has shown a clear path to profitability, which is key, Black said.
"You should be able to see that it's got cash flows and profitability within a year or, again, it's going to be a hard stock to own in this environment," he said.
Lastly, investors who want to maintain growth exposure in the face of rising rates should hedge their positions, Black said. One way to do that is with options, but investors can also look for names that offset their exposure.
"A great way to hedge against Tesla is to short Rivian Automotive Inc RIVN or Nikola Corp NKLA or something that isn't going to do as well," he said.
See Black's full presentation here:
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