A stock-picker's market?
Posted
Sep 04 2009, 04:24 PM
by
John Reese
Rating:
The investing world is often littered with new theories and new ideas about how best to make money. But over the years, I've found that the best way to produce solid, market-beating returns is to take advantage of the wisdom history's best investors have been kind enough to share. That's why I created my Guru Strategy computer models, and that's why each week I recap what some of the gurus I follow are saying about the market and economy.
This week the theme seemed to be that, while the economic future remains cloudy, it's a good environment for stock-pickers. That's what Mario Gabelli, a Benjamin Graham disciple with an excellent long-term track record, told Bloomberg. While ETFs or sector plays have become all the rage lately, Gabelli says he's focusing on individual stocks that have strong potential for the next three or four years. He gave his thoughts on potential plays in the financial, airline, newspaper, and telecom industries, and also said the food industry is ripe for a round of mergers.
Another top manager, Donald Yacktman, whose two funds are up about 9% per year over the past decade while the S&P 500 has been in the red, says he's focusing on high-quality stocks. Lower-quality firms have made big gains in the rebound, but the best buys now are plays like Coca-Cola (KO), Pepsi (PEP), and Procter & Gamble (PG), Yacktman, a bottom-up stock-picker, told Bloomberg. He says financials are still dangerous, but that he's found a great play in AmeriCredit (ACF).
Ronald Muhlenkamp, whose fund struggled last year but has regained 25% in 2009 and remains significantly ahead of the S&P 500 for the past 15 years, also sees opportunities. He's high on healthcare stocks, despite all the talk of huge reform in that area. “The best time to buy pharmaceutical or health care stocks has always been in election years, because that’s when everyone beats up on the industry," he told Fortune. "Right now, any positive news about health care would be a surprise. … In my business, you make money on the difference between perception and reality. When everyone expects the bad, that’s when you get the chance to buy Pfizer (PFE), which we own, for cheap.”
Muhlenkamp cautions that things are going to be different in the investment world. “This is not a normal cyclical recession -- this time, people have reset their expectations," he said. "For the market, fair value today is about 15-20% lower than what it was a year ago. We think there will be a 15% drop in return on equity, our favorite metric. Price to earnings ratios should be below what they were.”
Bond guru Bill Gross of PIMCO also sees a "new normal", and his warnings seem more dire than Muhlenkamp's. Gross wrote in his latest market commentary that "children of the bull market" need to "grow up" and adjust their expectations as the economy goes through delevering, deglobalization, and reregulation. "It’s time to recognize that things have changed and that they will continue to change for the next -- yes, the next 10 years and maybe even the next 20 years," Gross writes.
Gross offered several tips for investing in the "new normal" -- though he says it's still unclear exactly what that "normal" will look like. Most likely, he says, "Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit." He also thinks Asia and Asian-connected economies like Australia and Brazil will dominate future global growth, and that the dollar is vulnerable on a long-term basis.
Finally, in an op-ed for The New York Times, Yale economist Robert Shiller took a different take on the future of the markets and economy, saying that emotions are key to the recovery. Shiller says that supposedly key economic indicators like unemployment or retail sales figures aren’t causes of a recovery, but symptoms of one. “For a fuller explanation, look beyond the traditional economic links and think of the world economy as driven by social epidemics, contagion of ideas and huge feedback loops that gradually change world views,” he wrote. “These social epidemics can travel as swiftly as swine flu: both spread from person to person and can reach every corner of the world in short order.”
With emotions driving the market and economy, Shiller says recent improvements in sentiment could lead to a self-fulfilling prophecy of economic recovery -- though a change in the storyline could push the market back into another downward feedback loop.
Full disclosure: I'm long KO, PEP, PG, ACF, and PFE.
John Reese is founder and CEO of Validea.com, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book, "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".
