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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Reese: Look to Dividend Stocks, Not Treasuries

In his latest article for Forbes.com, Validea CEO John Reese says that dividend-paying stocks — not Treasury bonds — are a good place to look for yield in the current market environment.

With investors flocking to the perceived safety of Treasury bonds amid the U.S.’s economic fears, yields on Treasuries have plunged. “Annual returns of 2.1% for ten years or about 3% for twenty years simply don’t look too attractive — especially when you consider that the U.S. has been flooding the financial system with cash that could eventually lead to some serious inflation,” Reese writes. “Where to turn for yield then? Well, a myriad of companies’ stocks are offering dividend yields twice, or even three times what the Treasury is paying. Of course, you don’t get the guaranteed nominal return on your capital when you buy stocks. But given how the recent downturn has slashed valuations, and given that stocks of strong companies tend to fare far better than bonds during inflationary climates, I think [many] big dividend-payers are a more attractive option right now for those with long-term time horizons.”

Reese uses his “Guru Strategies” — each of which is based on the approach of a different investing great — to find fundamentally sound high-dividend paying stocks. Among those he highlights: communications giant AT&T. Click here to read the full article and see the other picks.

Bogle Sees Stocks Outperforming Bonds

Vanguard Founder Jack Bogle says the odds are “very, very much in favor of stocks” outperforming bonds over the next decade, but also says investors might want to take a bit of risk off the table.

“I would say given the dire outlook for the U.S. economy, unless our Congress can get its act together, that one might want to be a little more conservative than one usually is,” Bogle tells Morningstar. “If one wants to do anything at all it will be to lean to the conservative side. I am not recommending, you know, all of a sudden go out and do something very conservative. But if you are worried, just take a little bit less risk rather than a little bit more risk thinking there are some advantages here because there are lot of problems down the road that we have no idea whether they will be solved one way or the other.”

At the same time, Bogle says stocks look like a good bet to outperform bonds over the next decade. “Stocks … have a yield of around 2.3%, the same as the 10-year Treasury, but they have earnings that should grow even if the economy grows a little more slowly than say at 4% instead of 5% in nominal terms, that would be a 6% return on stocks. Maybe they can grow a little faster. That would be a 7% return on stocks for example, unless P/Es change radically,” Bogle says. “So in terms of what will do a better job for you over the decade ahead, the odds are very, very much in favor of stocks. But that’s not guaranteed.”

While the two ideas — the recommendation to take a bit of risk off the table when he thinks stocks are likely to outperform — may conflict, Bogle says you also must consider the possible consequences if stocks don’t outperform. “I also like to think of the consequences — I don’t like to think about them, they are rather unpleasant — but the consequences if things go wrong, so we can call it some dry powder or we can talk and call it a little formula for sleeping better at night when you go through these volatile times,” he says. “It’s just a question of being at peace with yourself as an investor and staying out of speculation.”

Bogle also discusses whether or not there’s a bubble in Treasuries; regulatory changes; and what the government can do to promote growth.

Focus on Dividends, Siegel Says

Wharton professor and author Jeremy Siegel says dividend-paying stocks — not Treasury bills, which he says are back in “bubble” territory — are the place investors should look for yield.

“Despite the slow growth over the past decade, U.S. corporations, as typified by those in the S&P 500 Index, have been making record profits by enhancing productivity and deriving nearly half their sales from growing overseas markets,” Siegel writes in a Wall Street Journal column co-authored by Jeremy Schwartz, the director of research at WisdomTree Inc., the firm for which Siegel works as a senior advisor. “Despite the sluggish economy, the corporate sector is churning out record profits and increasing dividend payments. We believe dividend-paying stocks are the answer to a Treasury bond market that looks more dangerous than ever.”

Siegel and Schwartz say that, while investors have piled into inflation hedges like Treasury Inflation-Protected Securities and gold, equities are a better option. “Equities, like precious metals, are also real assets whose return has compensated investors for inflation,” they say. “Per share dividends of the S&P 500 firms have grown at 5% per year over the last half-century, which handily beat the average rate of inflation of 4% during the period. In fact, dividend growth has beat inflation both during the low inflation periods of the 1960s, 1990s and 2000s, and the high inflation periods of the 1970s and early 1980s.”

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