While still somewhat wary of the economy, Jim Oberweis says that you can find plays in the technology and consumer discretionary sectors – “the pillars of a growth portfolio” — if you know where to look.
Oberweis writes in his latest Forbes.com column that retailers such as restaurants, auto suppliers, consumer semiconductor makers, and advertising firms have been posting big year-over-year growth numbers, but that part of that is due to easy comparisons to the previous year, when the financial crisis was at its peak. “Such easy comps will come to a close by the end of this year, and we are really stumped about what will then drive continued macroeconomic growth,” he says. “Darn. Picking consumer-focused stocks with the potential to buck future headwinds will be key.”
To buck those economic headwinds, Oberweis says one area to look is “carefully selected niche-oriented small caps”. He offers a few retailers that are high on his list, as well as some tech sector picks. “Technology’s lost decade is over,” he says. While global semiconductor industry capital spending fell sharply in 2008 and 2009, he says that trend won’t last. “Capital investments can be put off for a period of time, but eventually technology companies have to keep up,” he says. “We expect that 2010 will be better for tech stocks. … In particular, bet on companies building the latest-generation semiconductors or facilitating greater network bandwidth.”
In his latest Forbes.com article, Validea CEO John Reese takes a look at stocks that might interest two of history’s top investors, Peter Lynch and Bruce Berkowitz.
Reese notes that Berkowitz — Morningstar’s domestic fund manager of the decade — focuses his analysis on “free cash flow yield”. Free cash flow is essentially the cash that a firm can use to grow its business, pay dividends or pay off debt — all of which are critical factors for investors, Reese notes. Free cash flow yield is thus free cash per share divided by share price. Berkowitz has said he likes to see free cash flow yields of 10% or more.
Reese examines a handful of stocks that have free cash flow yields around 10% or more and also get approval from one of his Guru Strategies, each of which is based on the published approach of a different investing great. He finds that his Peter Lynch-based approach is particularly high on some big free-cash-flow-yielding firms. To read the full article, click here.
While many are predicting that the coming decade will feature some strong bounce-back gains for stocks after a poor 2000s, Rob Arnott of Research Affiliates says not to count on it.
In a piece written with John West for IndexUniverse.com, Arnott says that the standard market-cap-weighted 60/40 stocks/bonds allocation “is likely to disappoint. Again. Net of inflation, it could even be worse than the past 10 years.”
Arnott and West, who last month showed how a portfolio diversified over 16 different asset classes could’ve produced returns of more than 8% in the last decade, say alternative asset classes like emerging market bonds, REITs, and TIPS aren’t nearly as attractive heading into the 2010s. “Today, yields on most of these diversifying assets are well off the rich premium levels at the turn of the century,” they say. “Back then, NASDAQ-induced neglect led to a whole spectrum of alternative asset classes, favorably priced for attractive long-term returns. Today, we aren’t so lucky, as many off-the-beaten path categories sport rock bottom yields (and, therefore, low forward-looking returns).”
Barry Ritholtz of Fusion IQ and The Big Picture blog remains bullish on stocks, saying that he sees no indication that the rally is in its final stages. “As long as the fed is going to make money free … it’s hard to find a short, other than some company restating earnings,” Ritholtz tells Yahoo! TechTicker. “Nothing [in the market internals] is saying, ‘Hey it’s all over but the crying.’” Ritholtz, who saw both the credit crisis and the rally coming, says the “easy” trade now would be to move to cash amid fears that the rally is petering out — but he adds that over the years he’s found that the easy trades aren’t usually the ones that make him money.
Yale Economist Robert Shiller, one of the creators of the S&P/Case-Shiller home-price index (which new data shows rose for the seventh straight month in December), says buyer confidence is behind the recent rebound in home prices across the U.S. Shiller tells Bloomberg that he thinks a lot of new buyers are jumping into the housing market because they think the recession has ended, and want to “get in first”. Shiller also discusses what issues could derail the housing recovery.
Each week, we take a look at which stocks John Reese’s Validea.com Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today. Among the bigger names: General Electric and Eli Lilly.
Author and money manager James O’Shaughnessy says that the Federal Reserve’s recent increase of the Discount Rate was “not a big deal”, and that he’s still very bullish on stocks over the longer term. O’Shaughnessy tells CNBC that he thinks factors are in place that will make stocks the “asset class of the choice” over the next three to five years.
Liz Ann Sonders, Charles Schwab’s chief investment strategist, says in her latest market commentary that the recent downturn helped temper some of the investor optimism that was becoming “troublesome”, and that — despite the big gains stocks have made in the past year — stock valuations continue to look attractive.
Sonders’ favorite valuation gauge is the “normalized” price/earnings ratio, which uses four-and-a-half years of historical earnings and two quarters of projected earnings. She also uses the average of reported and operating earnings. Using that approach, she says, “we’re right at the long-term median valuation of just more than 17 times earnings” for the S&P 500.
The market may actually be a bit cheaper than that, Sonders adds, because of inflation (or lack thereof).
In an interview with Texas’ The Statesman, Vanguard’s John Bogle says the key to successful investing is keeping things simple, and not allowing short-term performance to impact your decisions.
“[The biggest problem in investing] is that people are focused on short-term performance,” Bogle tells Scott Burns. He says that there will always be some funds that beat the market in the short term, but that “the willingness to project the immediate past into the future” is what hurts many investors.
Bogle says many investors fail to realize that investment returns are made up of two major parts: fundamental return, which includes a firm’s dividend yield and earnings growth, and speculative return, which involves how much investors are willing to pay for a dollar of a firm’s earnings. “Over time, it’s all about the fundamental return,” Bogle says. “The speculative returns tend to cancel out. Basically, the stock market is a giant distraction from the business of investing.”
Like Bill Gross, Wharton professor and author Jeremy Siegel doesn’t see a hike in the Federal Funds rate as imminent, despite the Federal Reserve’s recent decision to up the Discount Rate. Siegel tells Bloomberg he thinks the Fed will raise the Discount Rate “two more notches up” before it begins to increase the Federal Funds rate.