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Bond King Bill Gross Says Investors Should Stay Away From Stocks. Still, There Are 2 He Likes Anyway.

Motley Fool - Sun Oct 8, 2023

Over the past couple of months, there's been a tug-of-war playing out on Wall Street. Some believe a recession is imminent, while others are calling for a so-called "soft landing," where the economy narrowly avoids recession before beginning a comeback.

Bill Gross, known as the Bond King, falls squarely in the first camp. In a missive posted on his website this week, the legendary investor shared his thoughts about the challenges facing the economy. In short, he says that stocks are "clearly overvalued," surprising many investors when he said he'd "pass on stock and bonds" for now.

That said, there are a couple of ideas he remains bullish on.

A person clenching their fist in victory while looking at graphs on a computer.

Image source: Getty Images.

Who's Bill Gross?

Gross made a name for himself by creating the first investible market for fixed-income securities. The legendary bond investor and fund manager is the co-founder and former chief investment officer of the Pacific Investment Management Co. (PIMCO), which focuses on fixed-income investments.

Gross was named the Bond King by Fortune in 2002 and has a long list of industry accolades to his credit. He was cited by Morningstar as the Fixed Income Manager of the Decade in 2010 and Fixed Income Manager of the Year in 1998, 2000, and 2007. He was awarded the Bond Market Association's Distinguished Service Award in 2000 and was the first portfolio manager to be inducted into the Fixed Income Analysts Hall of Fame.

So when Bill Gross talks, people listen.

His advice: Avoid stocks (and bonds)

Gross has been outspoken about his concerns for the economic picture over the short term and the Federal Reserve's ability to stave off a recession. As evidence, he points to the rising yield of 10-year U.S. Treasury bonds, which briefly hit a 16-year high on Wednesday, climbing above 4.88%, while 30-year Treasuries traded above 5%, both achieving levels not seen since 2007.

Some market watchers suggest that strong demand and accelerating adoption of artificial intelligence (AI), which is expected to ignite stark productivity gains, will boost the economy and kick-start the next bull market. Gross is dubious. "But still, a new bull market?" he writes. "Can AI and $2 trillion fiscal deficits going forward validate that 'it's different this time'? I'm suspicious."

The resulting uncertainty is enough for Gross to suggest investors avoid both stocks and bonds, at least for now. "I'd pass on stocks and bonds in terms of future total returns," he notes.

The exception to the rule

While most stocks are too expensive right now, according to Gross, the "best bets" are two stocks that offer compelling opportunities in merger arbitrage -- a risky investment approach that most individuals should not try. The Motley Fool is an ardent believer in a long-term approach to investing. That said, it's at least worth noting his thoughts on these two companies.

The first stock Gross likes is Activision Blizzard(NASDAQ: ATVI). The video game maker owns such popular titles as Call of Duty, World of Warcraft, Diablo, and the Candy Crush franchise. Microsoft has agreed to acquire Activision in an all-cash deal valued at $68.7 billion, or $95 per share.

After initially facing regulatory hurdles, it now appears that the deal will close over the next couple of weeks. Activision Blizzard shares were trading at $93.67 when the market closed on Thursday, or about 1.5% below the deal price.

The second stock he likes now is Capri Holdings(NYSE: CPRI), the owner of such iconic fashion brands as Versace, Michael Kors, and Jimmy Choo. Luxury fashionista Tapestry, which owns Coach and Kate Spade, has agreed to acquire Capri in a deal worth $8.5 billion, or $57 per share.

The deal is expected to close by the end of 2024, with shares trading at $51.32 when the market closed on Thursday, or roughly 11% below the deal price.

The fine print

While these two ideas may sound intriguing, it's important to take a step back and look at the big picture. Although both deals are now expected to close, nothing is etched in stone, and there's always the potential that either or both of these deals could hit a roadblock and not be completed. Investors need to consider the possibility that a merger could fall through, leaving them as owners of the stocks in question -- which could then fall back in price.

So again, this is not an investment approach suitable for most individuals. Staying focused on the long term is what will serve most investors best.

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Danny Vena has positions in Activision Blizzard and Microsoft. The Motley Fool has positions in and recommends Activision Blizzard and Microsoft. The Motley Fool recommends Tapestry. The Motley Fool has a disclosure policy.

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