Paulsen: Buy What Others Are Avoiding

Wells Capital Management Chief Investment Strategist James Paulsen says U.S. consumers and the U.S. economy are being more resilient than many think. Paulsen also tells Bloomberg that he’s high on industrial stocks, technology stocks, and emerging market stocks, which he thinks have been beaten down too far by investors.

 

How the AAA Firms’ Stocks Stack Up

In his latest column for Canada’s Globe and Mail, Validea CEO John Reese takes a look at how some companies with top credit ratings look as possible investments.

Following the U.S.’s credit downgrade by Standard & Poor’s, S&P also downgraded several insurance companies tied to the U.S. markets, Reese notes. “The downgrades and changes in outlook were the latest part of a lengthy trend,” he says. “Back in the early 1980s, about 60 U.S. companies had triple-A credit ratings; by 2000, the number was down to about 15. Today, only four remain: Microsoft Corp., Exxon Mobil Corp., Johnson & Johnson, and Automatic Data Processing Inc.”

In addition to those four, Reese uses his “Guru Strategies” to assess two other U.S. companies with AA+ ratings, as well as some of Canada’s highest-rated firms. “I found a mixed bag,” he says. “In the U.S., four of the six get solid scores; in Canada, only a few … A-level companies are publicly traded on Canadian exchanges, and those that are … don’t excite my gurus’ models.”

To read the full article and see the four top-rated U.S. firms whose stocks looked attractive, click here.

 

Stocks Pricey and Risky — But Shouldn’t Be Avoided, Shiller Says

Yale Economist Robert Shiller says he thinks stocks “look highly priced, but not super highly priced”. In an interview with Consuelo Mack on WealthTrack, Shiller says the market’s 10-year price/earnings ratio (which averages earnings over the past ten years) has historically averaged about 15; lately, it’s been around 20. But Shiller says it’s “not too disquieting” a number, and that, given the long-term success of stocks, investors shouldn’t avoid them. “I think that one might make a substantial investment in the stock market now — but with full knowledge [that] it shouldn’t be everything, because it is risky,” he says. He adds that there’s a “real chance of a substantial drop in stock prices — I’m talking big,” given the economic situation at home and abroad and — importantly — the impact they are having on people’s psyches.

Top Fund Manager Putting Cash To Work

Steven Romick, who has been one of the U.S.’s top mutual fund managers for over a decade, says he’s tilting his portfolio toward larger firms with international, non-dollar exposure.

Romick tells Barron’s that he’s been buying stocks in the past few weeks as markets have struggled. But, he adds, “this isn’t a time to put all our chips on the table. We’ve increased equity exposures, because if you have a fair amount of inflation coming down the road, you don’t really want to be all in cash. If you have deflation, cash isn’t such a bad thing. We think longer-term, you have inflation, but there are clear deflationary pressures out there today. Over many years, we want exposure to other countries with faster growth and other more robust currencies.”

Romick says his fund’s cash position has fallen from 27.5% to about 22.5% in the past few weeks as he put cash to work. “It went into these large-cap businesses that were attractively priced,” he says. “This isn’t the time to be moving down the quality curve, so we actually own more high-quality businesses than at any other point in our history.”

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Mobius: EMs Offer Safety — If You Diversify

Templeton Asset Management’s Mark Mobius continues to say that emerging markets should be a safe haven for investors, but he stresses that a diversified approach to EMs is key.

“A whole picture globally is that emerging markets will be the safest play,” Mobius tells The Economic Times. “Why? Because they are growing at three times faster than the developed countries, their debt to GDP levels are lower, their foreign exchange reserves are higher.”

But, he adds, “you cannot really pinpoint whether it is going to be Brazil or Turkey or Thailand” that lead the way. “You have got to be diversified among these various countries because you can have volatility from one to the other.”

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Tilson & Heins on Staying Disciplined

Warren Buffett has said that investing is simple, but it’s not easy, and in their latest Kiplinger’s column, value investors Whitney Tilson and John Heins explore that subject.

“In The Little Book That Beats the Market, published in 2005, star money manager Joel Greenblatt describes a ‘magic formula’ for success that ranks stocks based on only two factors: share price relative to a firm’s earnings and return on capital,” Tilson and Heins write. “After reading his book, we asked Greenblatt if widespread adoption of his simple plan might undermine its effectiveness. He was unconcerned: ‘Value investing strategies have worked for years and everyone’s known about them. They continue to work because it’s hard for people to do, for two main reasons. First, the companies that show up on value screens can be scary and not doing so well, so people find them hard to buy. Second, there can be one-, two- or three-year periods when a strategy like this doesn’t work. Most people aren’t capable of sticking it out through that.'”

Tilson and Heins say that touches on the main challenge for value investors — the fact that in order to beat the crowd you have to go against it, and in going against it you can run into short-term underperformance that can make you look very, very bad.

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