SATURDAY, APRIL 24, 2010
Be Very Careful
By JACK WILLOUGHBY
The bulls in our Big Money poll pulled in their horns a bit and see only tepid gains for stocks between now and year's end. Stay away from bonds.
AFTER A BLISTERING 14-MONTH RALLY, AMERICA'S money managers are showing signs of buyers' fatigue. They are less bullish about the outlook for stocks than they were in the fall, in part because the pickings -- of undeservedly cheap shares -- are slimmer.
Only 46% of the professional investors responding to Barron's latest Big Money poll call themselves bullish or very bullish about the stock market's prospects in coming months. That's down sharply from the 59% who were bullish, and presciently so, in our fall survey.
The bears' camp has grown modestly, to 16% of poll respondents, compared with 13% last fall. But the ranks of those who are neutral has swelled -- to 38% from 28% last November. With stocks up 70% from their March 2009 lows, it's little wonder more professional investors are ambivalent. Indeed, 48% of Big Money managers now consider the market fairly valued, while 26% say stocks are overvalued.
Scott Pollack
Scott Schermerhorn, of Granite Investment Advisers in Concord, N.H., which manages $589 million, typifies the current view. Schermerhorn, who classifies himself as neutral, sees the Dow Jones Industrial Average rising to 11,470 by year end, a gain of only 3% from last week's close. He predicts a choppy ride, as investors rotate away from expensive small-capitalization stocks and into relatively undervalued big companies with strong and stable earnings. His current favorite: Comcast (ticker: CMCSA), the cable-TV giant.
Schermerhorn is hardly alone in questioning whether the underlying strength of the U.S. economy justifies the stock market's ascent in the past year or so. "The second half of this year is a question," he says. "Once the [government] credits and stimulus go away, what is the true growth rate of the economy?"
POLL RESPONDENTS HAVE MUTED MARKET targets, as well, for this year and next. Based on the bulls' mean prediction, the Dow will end 2010 at 11,285, and climb to 11,655 by June 2011, for an overall gain of roughly 500 points, or 4%, from current levels. The optimists see the Standard & Poor's 500 rising 5% to 1,272 by the middle of next year, and the Nasdaq tacking on 3%, to 2,600.
(TO ENLARGE CLICK ON : http://barrons.wsj.net/public/resources/images/BA-AS699B_Big_M_NS_20100423180820.gif)
As for the key indexes eclipsing their all-time closing highs -- 14,164 on the Dow, 1,565 on the S&P and 5,132 on the Nasdaq -- fuggedaboutit, as they say in these parts. Twenty percent of the Big Money managers think that will happen in three years, and 40% say it will take five years. But a fourth of our respondents don't expect stocks to revisit those rarefied heights for another decade, at least.
More likely, the market will advance gradually, interrupted by setbacks like the 6% drop that so unnerved investors in the first two months of this year. Nearly half our respondents put 25% odds on a sharp correction in the next several months, while the other half say the likelihood of a selloff is 50% or greater.
Charles Lemonides, chief investment officer of New York-based ValueWorks, which manages $175 million, draws encouragement from all the pessimism. He sees the DJIA touching 12,000 by year end and 13,000 by the summer of 2011, while the S&P 500 could climb to 1,425, and the Nasdaq Composite to 2,900, by June of that year. Says Lemonides, "We've gone from a complete collapse to a better economic environment. It's classic in its design, but perhaps not in its intensity."
Despite their caution, 62% of managers say stocks will be the best-performing asset class in the next six to 12 months. Eighteen percent favor commodities, while 13% predict cash, even with its negligible yield, will return more than other investments.
Almost no one favors bonds, least of all Treasuries, after their mighty rally in recent years. Nearly 80% of the managers say they are bearish on government debt, while a near-equal proportion believe the stampede into mutual and exchange-traded bond funds will subside in coming months.
Last year investors plowed a net $465 billion into bond funds, compared with a net $4.5 billion into equity funds. This year (through April 22) another $123 billion, on a net basis, has come into bond funds, while a net $30 billion has gone into equity funds, according to Robert Adler, head of Lipper FMI, a division of Thomson Financial.
(TO ENLARGE CLICK ON : http://barrons.wsj.net/public/resources/images/BA-AS700B_Big_M_NS_20100423180440.gif)
The Big Money managers say they expect 12-month returns of only 1.86% from fixed-income investments, versus expected returns of 10% from stocks. "The risk/reward is on the side of equities," says Doug McEldowney, a West Palm Beach-based portfolio manager for Northern Trust. "If interest rates increase, bondholders and bond funds will lose principal. That can come as a surprise for people who thought they were investing for safety."
EMERGING MARKETS WERE THE EQUITY flavor of 2009, but more Big Money pros are coming home this year. Forty-four percent think the U.S. will be the best-performing stock market in 2010, compared with 28% who felt that way last fall. Emerging Asia looks strongest to a fourth of our respondents, while 14% see the biggest gains coming from Latin America, and 11% are betting on a resurgent Japan.
The Big Money Poll is produced twice yearly by Barron's, in the spring and fall. The latest survey, prepared with the help of Beta Research in Syosset, N.Y., drew responses from 110 investors from across the U.S. Some are sole proprietors; others manage billions of dollars for banks, mutual funds, pensions and other institutions.
The poll was e-mailed to investors in mid-March, when the Dow was trading around 10,750, the S&P 500 was at 1,166 and the Nasdaq was at 2,384.
What, if anything, might propel stocks sharply higher in coming months? Forty-two percent of poll participants say rising corporate profits would provide the requisite fuel. Wall Street analysts expect S&P 500 operating earnings to surge 27% this year, to $78.30, en route to an all-time high of $91.05 next year. But the Big Money managers are more circumspect, estimating a profit gain of 19% in 2010, and 9% in the first half of 2011.
What would cause a steep selloff in stocks? Almost half the managers indicate renewed signs of economic distress would be to blame, although 62% say they see no possibility of the dreaded "double dip" into recession. Others worry most about profit disappointments, rising interest rates and continued turmoil in the European Union, which has been beset by the credit woes of its weaker members, in particular Greece. Fears that Greece will default on its debt -- and that the problem will spread to other countries -- were partly responsible for the selloff in stocks earlier this year, as well as Thursday's rocky trading.
THE BEARS EXPECT THE DOW TO END the year around 9,800, which implies a drop of 12% from last week's close. They predict the S&P 500 will fall to 1,044 by Dec. 30, down 14% from here, while their mean year-end Nasdaq forecast is 2,127, compared with Friday's 2,520.
(TO ENLARGE CLICK ON : http://barrons.wsj.net/public/resources/images/BA-AS701C_Big_M_NS_20100423225621.gif)
"I'm looking for a double dip [in the economy]," says one Big Money bear, David Corbin, who manages $170 million at Fort Worth-based Corbin & Co. "Folks on the coasts don't understand that many Americans are only $1,000 to $2000 a year above water. Federal and state taxes are going to drag folks under."
Corbin fears a second recession will drag the market under, sending the Dow industrials to 7,600 by year end and 6,700 by June 2011. Nor would it shock him to see the S&P 500 in the triple digits by the middle of next year, at 800. In his view, many stock-market investors "are getting suckered in just in time to get walloped."
Jim Peters, chief executive of Tactical Allocation Group in Birmingham, Mich., with $1.1 billion under management, also sees trouble ahead for stocks. "It is uncertain how President Obama's health-care reforms will play out in the market, he says. "We have an unprecedented level of government involvement in the economy. It makes fundamental analysis very difficult."
Peters predicts the Dow will end the year around 11,000, only to fall to 9,000 by the middle of 2011. The time to start worrying is in July, he says, when year-over-year earnings comparisons turn more challenging. Small and mid-sized companies will face the biggest problems, he adds, noting "large companies with global revenue will be cushioned somewhat."
The same might also be true for small and mid-sized stocks, given their outperformance in recent years. The Russell 2000 index, a popular small-cap proxy, trades for 27 times this year's estimated earnings of $27.62. The Russell 1000, it's big-cap counterpart, trades for 16 times forecast profit of $42.80. The discrepancy suggests one reason why 56% of Big Money managers think large-cap stocks will perform best in the next six to 12 months. Only 14% expect small-caps to continue their reign.
"So far, we haven't seen the natural rotation to large-caps," says Christopher Tsai, principal of New York-based Tsai Capital, which manages $35 million. Tsai predicts that will happen this year. The key to outperformance, he says, will be big-cap, brand-name stocks such as Kraft (KFT), the world's No. 2 packaged-foods producer, after Switzerland's Nestlé (NSRGY).
Kraft trades for about 13 times Tsai's 2011 earnings estimate of $2.38 a share, and yields 3.8%. The company's hostile $19 billion purchase of Britain's Cadbury will broaden its exposure to big foreign markets such as Brazil and India. "Companies with strong brands create earnings power that gives them an edge in an inflationary environment," Tsai says.
THE BIG MONEY MANAGERS ARE LOOKING to health-care and technology shares to lead the market higher in the months ahead. Utilities and consumer cyclicals are expected to bring up the rear.
Our crowd is mixed, however, on the outlook for financials, the best-performing S&P 500 sector in the year ending March 31, 2010, with a gain of 80%. Fourteen percent of respondents think financials will continue to outshine other sectors, but 19% expect the industry to be this year's weakest performer.
Peter Scholtz, president of Scholtz & Co. in Darien, Conn., with about $100 million in assets, likes Hartford Financial Services (HIG), the big insurer, which accepted government support during the financial crisis but now is paying it back. Although the stock has rebounded to 29 from 9, it trades for only about seven times normalized earnings of $4 a share, he says.
Scholtz calls himself a scared bull who sees the market edging up through the end of this year but retreating in 2011 as inflation grows more problematic. "I see us approaching a top in the next year," he says. "[The Federal Reserve] might be willing to put up with a year or two of inflation, but getting it under control will be very difficult. They ultimately will fail. The market doesn't get into trouble when interest rates go up. It gets into trouble when real rates go up."
Scholtz says he's beginning to dial back on highflying stocks such as retailers, which now sport lofty price/earnings multiples.
In addition to their growing fondness for big-caps, many Big Money managers think growth stocks will trump value stocks in the year ahead. These preferences inform their current stock picks, which no longer include old favorites such as Berkshire Hathaway (BRKA) and Microsoft (MSFT). Topping the list instead are Qualcomm (QCOM), the world's biggest maker of cellphone chips, and Cisco Systems, the computer-networking giant, followed by Cenovus Energy (CVE), a Calgary-based oil and gas producer formed last November when EnCana (ECA) split its operations in two.
Qualcomm shares took a body blow Thursday, falling about 8%, to 39.13, after the company warned that its June-quarter profit might come in somewhat lighter than analysts were expecting. But that doesn't deter fans such as Seth Shalov, a principal at Cleveland-based MAI Wealth Advisers, which oversees $1.5 billion. "For us, it is a buying opportunity," Shalov said Thursday, noting MAI's strategy is to buy shares of technology companies with little debt and strong cash flow.
At the end of March Qualcomm had more than $12 billion, or $7 a share, of cash, and almost no debt. Its shares look inexpensive at 17 times this fiscal year's estimated earnings of around $2.30 a share. Back out the company's cash horde, and the stock is trading for only 14 times consensus estimates.
As for Cisco, a favorite of Ron Doyle, head of equity investment at MeadowBrook Investment Advisors in Livonia, Mich., the stock trades for about 18 times fiscal 2010 estimates of $1.54 a share, and 16 times fiscal '11 forecasts of $1.72. (Cisco's fiscal year ends in late July.) The P/E is far below Cisco's 10-year median of 33.9.
Cisco is expected to be a major beneficiary of a recovery in information-technology spending, notes Tara Hedlund, another fan and portfolio manager with Turner Investment Partners, in Berwyn, Pa.
Tech and financial stocks, including Amazon.com (AMZN), Apple (AAPL), American International Group (AIG) and Google (GOOG), lead the list of names the Big Money men and women consider most overvalued. Amazon's shares have nearly doubled, to 143, from their 52-week low, although the stock fell 4.5% Friday after the online retailer issued disappointing second-quarter guidance, along with a stellar first-quarter profit report. At almost 40 times next year's expected earnings of $4.77 a share, and seven times book value, Amazon hardly is cheap.
THE MANAGERS' INVESTMENT VIEWS have been shaped, in part, by their economic forecasts. On average, they expect U.S. gross domestic product to grow by 3.05% in this recovery year, and by 2.37% in the first half of 2011. That could nudge the inflation rate, as measured by the Consumer Price Index, up to 2.47% this year and 2.87% next, from a recent 2.3%.
Most poll respondents think convincing signs of a recovery will spur the Fed to start lifting interest rates again in six to 12 months. By June 2011, they figure, the yield on three-month Treasury bills will have climbed to 1.13%, real money compared with last week's 0.13%. Ten-year bonds will yield more than 4% by the end of this year, and as much as 4.67% by mid-'11, versus 3.82% now.
"We've created a good environment for stocks," says Horacio Valieras, chief investment officer at Allianz Global Investors Capital of San Diego, which manages $48 billion.
"We are headed back to record profits," he added. "But we are replacing private debt with government debt, which ultimately will usher in inflation."
Consequently, Valieras predicts the embrace of bond funds will prove futile "because returns eventually will get eaten away by inflation and taxes."
(TO ENLARGE CLICK ON : http://barrons.wsj.net/public/resources/images/BA-AS702A_Big_M_NS_20100423181220.gif)
Martin Sirera, a money manager at New Orleans-based Capital One Asset Management, which manages $3.2 billion, is this spring's biggest Big Money bull. He maintains that U.S. economic growth will continue to outstrip expectations, with GDP rising 4.5% this year, and S&P profits climbing 30%. Economic growth and the increasing profitability of American corporations easily will support higher stock prices he says. Sirera sees the Dow advancing to 12,500 by year end, and 13,500 by the following June.
Eventually the U.S. will have to deal with its deficit, but the day of reckoning will come later, not sooner, in Sirera's view. He looks for tech and financial stocks to lead the market in the near term.
Big Money participants see good news for the dollar: 71% say it will strengthen against the euro in the next 12 months, while 60% expect it to rise against the yen.
The managers are divided, however, on whether the U.S. will become more competitive relative to other countries. Forty-four percent think so, but 37% expect us to lose ground, especially against emerging economies.
"A weaker U.S. dollar and highly motivated and productive workforce make U.S. goods and services more competitive in world markets," one manager wrote, "Additionally, U.S. corporations are as financially secure as they have ever been."
In part, that's because U.S. companies have paid down debt, cut costs and hoarded cash in the lean years that most hope are ending. What they do with their cash will help to determine what investors do with their shares. Nearly 40% of Big Money managers think that stash would be put to best use funding acquisitions; 33% say it should go toward dividends, and 16% hope it will be spent to buy back stock.
"There is enough confidence in the market that investors and corporate chief executives are willing to engage in major transactions -- both buying and selling," says Peter Langerman, CEO of the Mutual Series Funds Group based in Short Hills, N.J. "We expect an increase in mergers and acquisitions."
THOSE WHO QUESTION AMERICA'S ABILITY to keep up cite "excessive taxes" and "complex government regulation." Eighty-six percent of respondents expect the Bush administration's tax cuts to be allowed to expire after this year, which could mean sharply higher taxes for wealthier Americans. The managers think that will be detrimental to the economy and the market.
The managers' political predictions suggest most Americans are OK with the status quo -- for now. More than a third of poll participants predict the Republican party won't regain control of the Senate or the House of Representatives in the November mid-term elections. Yet, come 2012, 65% don't think President Barack Obama will be reelected. At this early date, 35% of managers think former Massachusetts Governor Mitt Romney will be the Republicans' candidate for President. Five percent expect the nod to go to former Alaska governor Sarah Palin.
Anyone can make predictions, but managing money is much harder work, even when the financial markets are roaring. That is evident in the "true confessions" portion of our survey, where only about two-thirds of managers said they were beating the S&P 500 this year, both professionally and personally.
The year is relatively young, however, which leaves plenty of time for laggard investors to make up lost ground -- and for their market forecasts to come true.
Copyright 2010 Dow Jones & Company, Inc. All Rights Reserved
0 comments:
Publicar un comentario