Vanguard founder Jack Bogle says the stock market is a “giant distraction to the business of investing”. Over the long run, he tells Fox Business Network, stock returns depend on how well Corporate America does; but in the short term, stocks have “inexplicable ups and downs” based on people’s opinions — not facts. He says that given the current situation, the market is poised to deliver average investment returns of about 7% or so for the next decade, based on corporate earnings growth and dividend yield. But in the short term, it will deviate sharply above and below that figure based on investors’ mood swings. “People are better off not to pay any attention to it,” he says of the short-term swings. Bogle also says he thinks it will take about three years for the U.S. economy to be “doing what it’s supposed to do again”, and explains why.
In his latest article for Morningstar, Validea CEO John Reese looks at top stocks from the service sector — an area of the economy that he says is faring better than many realize.
“Service-type companies, and the service sector as a whole, have become the real bellwethers of U.S. economic activity,” Reese writes. “And lately, if you listen to the pundits, you’d think that the service sector is in dire straits, with fears of another recession — or worse — having dominated the headlines for the past couple months. But guess what? The real, hard data from the service sector hasn’t been that bad. In fact, some of it has been downright good. According to the Institute for Supply Management, the service sector has expanded for 21 straight months. And in August — a month when fear seemed to be everywhere — the sector not only expanded, but did so at a faster pace than it did in July.”
Reese uses his Guru Strategies — each of which is based on the approach of different investing great — to scour the market for some of the top service sector stocks right now. Among the five he looks at in the article: Advance Auto Parts, which gets approval from both his James O’Shaughnessy-based model and his Peter Lynch-inspired strategy.
Warren Buffett and Berkshire Hathaway recently announced a share buy-back authorization, which may be signaling optimism from Buffett on the economy.
The move marks the first time in four decades that Berkshire will be authorized to buy back its own shares, according to Bloomberg. It is allowed to do so only if its price is no more than 10% above book value. Berkshire’s willingness to repurchase shares is a bullish sign, according to Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC. He told Bloomberg that the announcement “is a bit out of character and for that reason is seen as very constructive both in terms what [Buffett] sees as an opportunity to buy a great asset, namely Berkshire stock, trading at a discount to historical book value as well as the portfolio of companies within Berkshire that he thinks is undervalued.”
Others contend that the move may be a sign that Buffett isn’t finding enough values in the stock market, and thus would rather buy back Berkshire’s own shares. But fund manager Eric Green of Penn Capital management seems to disagree. He points out to Bloomberg that Buffett “has a lot of investments in the largest companies in the market, so putting his money in Berkshire is another way of being bullish on the market. If the stock market is going down, then his stock will go down, and he’s certainly smart enough to know that and he thinks the market is undervalued.”
CNBC’s Alex Crippen, who maintains the Warren Buffett Watch blog, says, meanwhile, that the fact that Berkshire is authorizing the repurchase of shares at a premium of up to 10% of book value seems to be somewhat of a diversion from Buffett’s past comments. “In his letter to shareholders earlier this year, Buffett called book value an ‘understated proxy for intrinsic value.’ That is, book value would generally be below intrinsic value,” Crippen says. “But back in May of 2009, he told shareholders Berkshire’s stock price would have to be ‘demonstrably below’ a conservative estimate of the company’s intrinsic value for a buyback to be considered. He was setting a high bar, because he generally prefers to use cash for acquisitions or investments.”
Crippen also notes that the move involves an authorization to buy back shares — not a mandate. “Berkshire isn’t necessarily buying back shares now, and may never repurchase any at all,” he says. “By saying it might, however, Berkshire could be trying to suggest a ‘floor’ for the company’s shares.”
Buffett, for the record, has so far been mum on the move.
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.
Hedge fund guru Joel Greenblatt says that, based on trailing free cash flow yields, stocks are trading at levels that put them in about the 95th percentile of cheapness when examining the past 20 years of market history. Greenblatt tells CNBC that if the past is any indication, valuation levels this low could be proceeded by a 15%-20% gain for the broader market over the next year, and gains of more than 30% for value-focused portfolios. Taking advantage of these bargains means having the fortitude to invest in some very unloved stocks, however, Greenblatt says.
Top value investor Charles De Vaulx has been cutting back on gold holdings and is high on oil and gas stocks and Japanese equities. De Vaulx tells Bloomberg that with cash yielding very little, bond yields low, and gold having gone “parabolic” over the summer, stocks of good companies with solid dividends look like attractive options right now. He’s still hesitant about Europe, where he says quality stocks haven’t come down enough in price to make them bargains, and many of the stocks that have fallen sharply are too risky. He says that discrimination may actually be a bullish sign, however.
Wells Capital Management Chief Investment Strategist James Paulsen says he thinks it’s time to lighten up on safety-oriented stocks like utilities and consumer staples, and put cash into more cyclical-type stocks, like industrials and emerging market plays. Paulsen tells Bloomberg that if October data continues to show that the U.S. economy isn’t entering a new recession, he sees a nice boost for stocks on the horizon, even if growth remains tepid.
Highly-rated strategist Francois Trahan says that “deflation” is not a dirty word, and that the Federal Reserve could help the economy by allowing deflation to stem commodity price inflation that is “eroding people’s pockets”. Trahan says Fed members and other policymakers and economists are relying on economic principles that aren’t relevant right now. Three main things are making the economy fundamentally different today than it was years ago, he says: consumers are deleveraging; governments are cutting payrolls; and the Federal Reserve has become ineffective. His outlook for the economy is “atrocious”, he says, and he advocates a cautious, safety-first investment approach right now.
The Cabot Market Letter is having another market-beating year, and its editor is preaching discipline amid the current market volatility.
“Going forward, it’s important to remember to take your cues from the market itself, and not from the headlines that are sure to push the market up and down in the days ahead,” Michael Cintolo recently wrote to subscribers, according to MarketWatch’s Peter Brimelow. “The goal is to preserve most of your capital today, so that you can make that much more once a new uptrend truly gets underway.”
Brimelow says Cintolo showed his discipline over the past week. On Sept. 21, Cintolo and Cabot said they’d be putting part of the Market Letter portfolio’s substantial cash position back into stocks, as several of its medium-term timing indicators flashed a “buy” signal. (Cabot uses a mix of fundamental analysis and a disciplined market-timing system that focuses on moving averages.) When the market tumbled Thursday, however, Cintolo said that Cabot’s timing system went back into bearish territory. Cintolo stuck to the system, and Cabot quickly sold some positions and downgraded others in its model portfolio, according to Brimelow.
Cabot’s track record is excellent. Over the past decade, its Market Letter portfolio is up 7.56% annualized vs. 3.67% for the dividend-reinvested Wilshire 5000 Total Stock Market Index, Brimelow says. Over the past five years it’s been even better, gaining 13.17% annualized vs. 1.28% for the index.
J.P. Morgan U.S. equity strategist Thomas Lee says we may be near an ideal buying opportunity for stocks.
According to Lee, 53% of stocks are trading for less than 12 times earnings, the most stocks selling so cheap since late 2008, the Financial Post reports. In addition, 51% of stocks are trading for less than two times book value, Lee says. Back when the market bottomed in March 2009, 67% of stocks were trading below 12 times earnings, and 66% of stocks traded for less than two times book value.
Lee says the valuation figures matter. “Investors have pointed to their reluctance to look at P/E valuations given concerns on earnings visibility,” he said in a note to clients. “But valuations ultimately mark lows — stocks get cheap enough that buyers are enticed.”
Lee is also more upbeat on the economy than many. He says he doesn’t think the European debt crisis will lead to another 2008-like situation, and, while many are fearful of another U.S. recession, he sees a more balanced picture. “Encouraging recently have been the continued rise in home prices, weekly claims holding steady, the August rise in leading economic indicators, and even the Architecture Billing Index, [a key construction activity], moving back above 50,” he said.