HERE'S A DECENT ARTICLE FOR SOME IDEAS AND PREDICTIONS:
How our 10 investing themes for '08 are doing, and what's changed
By Jonathan Burton
Jun 20, 2008 20:03:00 (ET)
SAN FRANCISCO (MarketWatch) -- Oil prices were below $100 a barrel and the Dow Jones Industrial Average was above 13,000 last November when MarketWatch wrote about 10 investments to consider for this year.
What a difference seven months, a credit meltdown, crumbling housing prices, $4-a-gallon gasoline, inflated commodities, recession fears, and a stock-market correction can make.
"I'm not feeling any better," says Sam Stovall, chief investment strategist at Standard & Poor's Inc. "I would have liked us to be a little farther along than we are. Now our forecast is for a delayed recession, rather than a canceled recession."
With that in mind, it's a good time to check on the 10 themes and see what changes, if any, investors should consider.
The bond landscape has changed dramatically since November, when the Federal Reserve was lowering short-term interest rates and Treasury prices were rallying in response. "Don't fight the Fed," MarketWatch advised, noting that some strategists saw the benchmark Fed funds rate tumbling to 2% from 4.5% before the Fed was done.
"Don't fight the Fed" is as apt today as it was then. Only now, the Fed funds rate is indeed at 2% after a series of aggressive cuts that began in January, and though there are whispers of rate hikes, central bankers likely won't rock the boat too much, if at all.
Treasurys were a good buy in the first few months of the year, but no longer, says Bernard Baumohl, managing director at forecasting firm The Economic Outlook Group. "We see inflation pressures increasing, and as a result that does place downward pressure on bond prices," he says. Plus, he expects Treasury yields will climb to lure reluctant foreign buyers to U.S. debt.
: Think outside the Treasury bond. Municipal securities are attractively priced, says Marilyn Cohen, president of bond-portfolio manager Envision Capital Management. Yields on 10-year munis are on par with comparable Treasurys. Says Cohen: "The closer your yield on munis gets to the Treasury, you've got a pretty good investment."
Non-agency-related mortgages -- bonds not backed by Fannie Mae, Sallie Mae or Freddie Mac -- make up 45% of the TCW Total Return Bond Fund (TGLMX, Trade), says Jeffrey Gundlach, the fund's manager and TCW's chief investment officer. "These securities are undervalued," he told investors on a conference call this week.
Bigger was better at the end of 2007. Large companies in strong, predictable businesses were seen as bedrocks against a volatile market and an anticipated economic recession. U.S. exporters and other firms with international sales got a currency-related pop since their overseas revenues were worth more in U.S. dollars. Moreover, foreign sales would offset a domestic slump in consumer spending.
Stocks of all sizes have since been shellacked, but, true to form, many large-cap shares have held their own.
The big surprise is how well midsized stocks have fared since the end of March. Midcap shares -- companies with market values of between $1 billion and $10 billion that tend to be domestically focused -- have eclipsed their larger, more globally oriented rivals.
"Earnings growth is expected to be twice that for midcaps over large-caps," Stovall says. "It's a very good way for investors to play the growth potential and nimbleness of smaller-cap stocks, but also be able to maintain the defensiveness of large-caps."
Aim for the middle. S&P's midcap recommendations include Jacobs Engineering Group Inc. (JEC, Trade ), Superior Energy Services Inc. (SPN, Trade ) and IAC/InterActiveCorp. (IACI, Trade ). But don't neglect large-caps: S&P's "buy" list now includes Archer Daniels Midland Co. (ADM, Trade ), Oracle Corp. (ORCL, Trade ) and Chevron Corp. (CVX, Trade ).
As MarketWatch put it last November, when corporate earnings growth is scarce, investors price it like diamonds. The increasingly anemic U.S. economy has only strengthened the case for growth stocks.
What kind of growth stock? Stable growers, says Brian Belski, U.S. sector strategist at Merrill Lynch. "Companies, industries and sectors," he adds, "that are delivering consistent earnings growth."
Go for growth, particularly among large- and midcap companies. Nowadays, some of the best growth-stock opportunities are in the technology sector, which Belski says is "as cheap as it's been since 1990." He's especially bullish on the computer hardware and software, telecom equipment and semiconductor businesses.
At S&P, Stovall also expects solid growth from the energy, materials and industrials sectors, in companies such as Apache Corp. (APA, Trade ), Monsanto Co. (MON, Trade ) and Norfolk Southern Corp. (NSC, Trade )
"The check is in the mail" is a throwaway line, but when it involves shareholder dividends you're talking real money. Dividends are a cushion against market uncertainty and volatility, and income-minded investors count on it. That's why even when the going gets tough -- banks are a good example -- companies will slash dividends only as a last resort.
"Dividend-oriented stocks have been a safe haven and in times of turmoil investors want something tangible," says John Buckingham, editor of The Prudent Speculator newsletter.
Focus on companies that hike dividends and deliver on earnings. "There are lots of opportunities in dividend payers across numerous industry groups," says Buckingham, who also runs the Al Frank Dividend Value Fund (VALDX, Trade). Top picks include General Electric Co. (GE, Trade ), AT&T Inc. (ATT, Trade ) and Verizon Communications Inc. (VZ, Trade )
Toward the end of last year, weakness in both the dollar and the economy were knocks against U.S. stocks. Meanwhile, business growth in other developed markets appeared much stronger, spurring many strategists to emphasize stocks in Europe and Japan.
Nowadays, these markets have slumped along with the U.S., falling even more sharply in Europe. That's prompting some experts to shift allocations slightly in favor of U.S.-based companies, albeit firms with a global footprint.
"Make sure they're exporting," says Jim Swanson, chief investment strategist at mutual-fund company MFS. "This is what's holding the [U.S.] market up."
Even if the dollar strengthens, as some strategists expect, U.S. multinationals are still well-positioned. Shares of these firms are cheaply priced and the companies are posting higher profits, Swanson says. "They're selling their products to people with stronger currencies and their costs are under control, so they can get profit-margin growth from that."
Keep a broad horizon. U.S. multinationals that stand to gain market share are evident across many sectors, says Bob Doll, global chief investment officer of equities at money manager BlackRock Inc. In particular, he taps ConocoPhillips (COP, Trade ), Exxon Mobil Corp. (XOM, Trade ), International Business Machines Corp. (IBM, Trade ), Hewlett-Packard Co. (HPQ, Trade ), Monsanto and McDonald's Corp. (MCD, Trade )
Technology companies are attracting even more support than they did last November. The sector is roaring back and is among the top performers of the past three months.
Even with this strong showing, Swanson says, the tech sector's "free-cash-flow yields are some of the highest we've seen in 20 years relative to price, and price-to-earnings ratios are not much more than the market as a whole."
Moreover, companies are redoubling efforts to boost efficiency and productivity to combat rising manufacturing and sales costs. Hiring more workers is not management's first option, so firms instead are spending on tech to produce and distribute goods cheaper.
Increased energy and transportation costs also encourage companies to allow employees to work from home, which also benefits tech companies, says David Kelly, chief market strategist at JPMorgan Funds, the U.S. mutual-fund arm of JPMorgan Asset Management. "If you can't bring Joe to the office," he notes, "you have to bring the office to Joe."
Stay connected. Doug Couden, manager of the large-cap Phoenix Strategic Growth Fund (PSTAX, Trade), says he's sticking with last year's tech leaders, namely Apple Inc. (AAPL, Trade ) and Research In Motion Ltd. (RIMM, Trade ). The fund manager is also bullish on EMC Corp. (EMC, Trade ), Broadcom Corp. (BRCM, Trade ) and Corning Inc. (GLW, Trade )
The tech sector, Couden adds, offers global reach and corporate spending on technology is "holding nicely." He adds, "We like the relative growth we see in technology, and valuations are not out of line."
Consumer-staples stocks are supposed to be the safety caps on an unruly market, and in November they seemed essential defensive players in a portfolio. Yet many well-known food, drink and household products companies have fallen off the shelf so far this year: Coca-Cola Co. (KO, Trade ), for example, is down 12% since January; Procter & Gamble Co., down 11%
People have to eat and drink, of course, but staples companies face the twin hurdles of higher production costs and stiff overseas competition. "Profit margins are narrow," says Brad Sorenson, director of sector research at Charles Schwab & Co. "Even though the demand continues to be there, they're having trouble passing along increased costs."
Health-care stocks also have been feeble, although the sector has perked up recently and more strategists are warming to it.
"Earnings are coming in strong yet the price-to-earnings ratios are the same as the market," says Swenson, the MFS strategist. "Drug companies and biotech have a built-in growth market in that the populations of the world are aging."
A political cloud hangs over health care, especially big pharmaceutical stocks and managed-care organizations, and may be holding the sector back, but JPMorgan's Kelly says concerns that the federal government will constrain drugmakers, insurers and other industry players are overblown.
"If there's an expansion of government spending on health care," he says, "the private sector is going to benefit."
Go shopping. BlackRock's Doll recommends Johnson & Johnson (JNJ, Trade ), Aetna Inc. (AET, Trade ) and Pfizer Inc. (PFE, Trade ). At The Prudent Speculator, Buckingham says he's drawn to the pharmaceutical companies' outsized dividend yields, and suggests researching Merck & Co. (MRK, Trade ), GlaxoSmithKline Plc (GSK, Trade ) and Eli Lilly & Co. (LLY, Trade )
Many areas of the industrial sector should continue to roll ahead. The slumping dollar has improved the competitiveness of U.S.-based manufacturing, engineering and construction firms, which stand to benefit from a global spending boom on infrastructure.
"We're seeing a massive breakout in infrastructure investment in the emerging-market countries, and there is no way that is going to subside meaningfully," says Baumohl, the Economic Outlook Group strategist.
Assemble the parts. S&P's Stovall favors construction firms such as Jacobs Engineering Group and freight-haulers such as CSX Corp. (CSX, Trade ), Norfolk Southern, Landstar System Inc. (LSTR, Trade ) and Old Dominion Freight Line Inc. (ODFL, Trade ). Meanwhile, Buckingham spies bargains in beaten-down shares of General Electric Co. (GE, Trade ), 3M Co. (MMM, Trade ) and United Technologies Corp. (UTX, Trade )
The furious and vitriolic arguments for and against investing in the energy sector could probably power a small country. Are high oil prices due to lack of supply, intense speculation, a combination of both? Whatever the reason, oil, precious metals and commodity-related stocks have been gushers, and their recent parabolic surge troubles many analysts.
"This is more about speculation now than it is about fundamentals," says Belski, the Merrill Lynch strategist. Moreover, the fundamentals are deteriorating, he adds. "Return on equity and profit margins are rolling over," Belski says, "and that is what has us concerned."
Drive carefully. "We're recommending that investors take profits in the energy sector," says Schwab's Sorenson. "They may miss some on the upside, but we think that will avoid the risk of a pretty sharp downturn."
That said, even if the price of crude tumbles to $100 a barrel, the oil patch will still be profitable and in demand. Cheaper oil would favor refiners such as Tesoro Corp. (TSO, Trade ) and Valero Energy Corp. (VLO, Trade ) and healthy orders for new rigs helps drillers such as Noble Corp. (NE, Trade )
Couden, the Phoenix growth-fund manager, holds shares of oil and gas companies including Apache, Schlumberger Ltd. (SLB, Trade ), XTO Energy Inc. (XTO, Trade ) and Chesapeake Energy Corp. (CHK, Trade ), but he's avoiding the integrated majors such as Exxon and Chevron Corp. (CVX, Trade )
Says Couden: "These companies will be putting up significant growth on a relative basis. You need to have some exposure."
With banking and other financial services stocks in decline last November, the question was: When do you catch a falling knife?
Ask anyone who's tried, and they'll lick their wounds and tell you, "Not yet."
To be sure, plenty of money is on the sidelines -- would-be buyers waiting for the banks' and brokerages' fortunes to improve.
"There are some good values, but still too much risk," Schwab's Sorenson notes. "We'd rather pick them after they've gone up a bit and have stabilized."
Give some credit. "The financial sector is more than just banks and brokerage firms," says Jean-Marie Eveillard, the value-hunting manager of First Eagle Overseas Fund (FESOX, Trade).
He's bought shares of American Express Co. (AXP, Trade ) for its predictable fee-based business. Others are banking on mutual-fund companies and insurance firms. Hugh Johnson, chairman and chief investment officer of money manager Johnson Illington Advisors, is bullish on fund giant Franklin Resources Inc. (BEN, Trade ) and insurer Hartford Financial Services Group (HIG, Trade ), along with American Express.
You might also try your knife-catching skills. "There will be a time when we look back and say this was a phenomenal chance to buy Bank of America Corp. (BAC, Trade ), Barclays (BCS, Trade ), Hartford, Lehman Brothers (LEH, Trade )," says Buckingham of The Prudent Speculator. "There's so much pessimism and tremendous opportunity."
