Susan, the cover of Barron's may be (contrarian) bullish, but the accompanying article isn't -g-
(edit- on second thought - they are bearish on the $ and tech)
Think Positive
April showers haven't squelched money managers' bullish views
By JACK WILLOUGHBY
T.S. Eliot had it right. April is the cruelest month, at least
for U.S.-traded stocks, which last month suffered their
worst rout since September. The Dow Jones Industrial
Average skidded 4.4% amid growing investor concerns
about corporate earnings and corporate accounting, while
the Standard & Poor's 500 fell 6.1% and the Nasdaq
Composite 8.5%, marking its second-worst April ever.
How surprising, then, that 47% of the professional money
managers responding to our spring 2002 Big Money poll
declared themselves bullish about the stock market's
prospects through the end of 2002. To be sure, that's down
from a blusterous 67% of respondents surveyed last fall,
just after the terrorist attacks that destroyed the World
Trade Center. But it's still impressive, given the daily
drumbeat of negative news coming from the corporate
sector.
The bullish managers
believe a pick-up in
earnings in this year's
third and fourth quarters
will drive the market
higher, lifting the Dow
above 11,000 in the
months ahead. "We're
going to have a global
recovery led by the U.S.,
which we'll start to see in
the second half of the
year," says Stephen Timbers, president of
Chicago-based Northern Trust Global Investments,
which manages $338 billion.
Timbers expects operating profits for the companies in the S&P 500 to increase by
15% in 2002, enough to push the Dow to 11,500 and the S&P to 1300 by December's
final bell. On the whole, the bulls think the Dow will end the year at 11,092, about 11%
above current levels. They expect the S&P to bow out at 1227 and the Nasdaq
Composite to close at 1991. These targets represent the mean responses of the group.
Martin Cunningham, vice president of New York-based Retirement Systems Investors,
which manages mutual funds for pension plans, was the most bullish forecaster this
spring, predicting the Dow would hit 13,500 by yearend -- a brand new record. Though
Cunningham now blushes at his optimism of two weeks ago, he still believes the
recovery will prove strong because of recent asset writedowns and layoffs at big
companies such as Verizon,J.P. Morgan Chase and Citicorp.
Cunningham also points to a government report two weeks ago indicating that the
economy likely grew by 5.8% in the year's first quarter. "We have low interest rates,
low inflation and relatively low unemployment," he says. "I think we're in pretty good
shape."
Some Big Money managers contend the market is in better shape, too, than April's
selloff suggests. Small stocks as a group have performed well, while the number of
stocks posting new highs has been masked by a ferocious selloff in other issues,
including some well-known technology and telecom stocks. "You've heard of the Nifty
Fifty," says Charles Berents, chief investment officer of Boston-based North American
Management, which handles money for wealthy individuals. "Now we have the Hated
Fifty -- all the stocks that people fawned over not so long ago. The joke around Boston
these days is 'Denver hasn't finished selling.' "
Tables: Stocks | Picks and Pans | Global Economies | Predictions
Denver, of course, is home to aggressive-growth mutual funds run by companies such
as Janus and Invesco, which shined like few others during the late, great bull market of
the 1990s. Growth's demise as an investment strategy, however, has robbed these
funds of positive returns and sorely dented their managers' reputations.
Berents believes the market's underlying strength will propel the Dow to 10,900 this
year and lift the overall return on equities to 12% in the next 12 months. His favorite
stocks for the coming year include Comcast, whose broadband cable network is gaining
steadily on the telephone companies, and the New York Times, which is well
positioned for a rebound in advertising.
Yet even diehard bulls admit they're having a harder time finding value in today's
market. Historically cheap stocks have rallied sharply in anticipation of an economic
recovery, while many blue chips now look black-and-blue. As a result, for the first time
ever, nearly 50% of the managers say they're bullish on stock markets elsewhere,
namely in Europe and Asia, where valuations are somewhat lower despite recent rallies.
The bulls are also in need of an industry sector to lead them to new highs. Whereas
technology and telecom stocks once provided the driving force behind the market's rise,
the managers think capital goods and health care will do the heaviest lifting this year.
Then again, it might require a larger group effort to lift the lumbering averages. "People
seem to want some hot sector to focus on," says John Waterman, chief investment
officer of Rittenhouse Financial Services in Radnor, Pa. "It makes investing easy. But I
don't think it's going to happen for the next couple of years."
Only 17% of the Big Money managers call
themselves bearish or very bearish these days,
roughly even with the fall 2001 poll. But a fair
number of last fall's bulls have now moved into the
neutral camp, which has doubled to 36%. In the
simplest terms, what separates the bulls from the
bears is a conviction that the Dow Industrials will
finish the year above 10,000. The bears just don't
buy it; they expect the Dow to fall to 9525, the S&P
to settle at 1040 and the Nasdaq to close at 1552 by yearend.
The Big Money poll, conducted for Barron's by Beta Research of Syosset, N.Y., drew
responses from 178 money managers across the U.S. They vary in investment style
and specialty, as well as mission, with some handling private portfolios and others the
assets of giant institutions. The smallest firms participating in the spring 2002 poll
manage a few million dollars. The largest handle billions.
Our latest semi-annual poll was e-mailed to managers in the second week of April, just
as the market's latest selloff was accelerating. At the time the Dow stood around
10,200, the S&P around 1100 and the Nasdaq near 1770. Some 64% of respondents
said they believed stocks were still a buy, while 36% indicated just the opposite.
Scott Schermerhorn, a senior portfolio manager for Columbia Management Group, a
subsidiary of FleetBoston Financial, considers himself a bear. "Expectations of an
economic recovery are getting out of line with reality," he says. "The recovery will be a
lot more muted than investors anticipate."
Schermerhorn believes the resulting
disappointment could drive the Nasdaq as low as
1200, almost 30% below its current price.
Technology stocks, in particular, are vulnerable to
further selling, he says, citing the run-up in
semiconductor-related shares at a time when
capacity utilization in the industry remains
"extremely low."
Patrick Becker, the founder of Becker Capital in
Portland, Ore., which manages $2.3 billion in
assets, also thinks tech shares are headed lower.
"Growth-stock portfolios still are loaded with tech," he says. "We have yet to see major
moves out of the sector, even though prospects continue to look bad."
Tellingly, 35% of the managers expect technology to be the weakest performer in the
next 6-12 months, a stunning reversal from recent years. Only 13% think the sector will
reverse course and lead the market this year.
While it might have been patriotic to talk bullish after the Sept. 11 attacks, and certainly
wise to have bought stocks, the bears have been scared by the market's subsequent
oscillations, not to mention some lurid corporate revelations. Donald Sazdanoff, chief
investment officer of Sovereign Asset Management in Lexington, Ohio, believes
accounting chicanery has undermined confidence in many companies and their stocks.
"Enron has had a spillover effect," he says of the disclosures that the infamous
energy-trading firm had engaged in dubious accounting practices. "Financial integrity
was really the bedrock of our financial system. When that confidence is shaken, you
have a lot of people who question if they want to remain involved."
Sazdanoff thinks the Dow Industrials will drop to 8700 by the end of the year, based
on his examination of market declines following previous bubbles. The S&P could fall
as low as 800, he says, and the Nasdaq could close near 1350, down about 75% from
its peak in March 2000, during the last market bubble. "The end result has always been
the same," he says. "It's taken years and years for valuations to come back."
Consequently, Sazdanoff is parking most of his money in cash and other short-term
investments, although he says he's spotted some values in stocks such as Philip Morris
and Rowan, the oil-services concern.
In the past two years, smaller stocks have ruled the
market, a circumstance that's proving true again in
2002. This year to date, the small-stock Russell 2000
index has rallied 5%, compared with a fractional
decline in the DJIA and a 6.5% decline in the S&P
500. Yet many portfolio managers believe bigger
stocks will return to the fore in the next two quarters,
especially as earnings improve.
"There's been a major decoupling among the
benchmarks, but large stocks now present an
opportunity," says Sheldon Lien, portfolio manager
for Anchorage-based McKinley Capital Management.
He notes that stocks such as Pfizer and General
Electric have fallen to multi-year lows and are valued
attractively relative to the market.
Big growth stocks, in particular, could lead the
market higher this year, in John Waterman's view. "Growth managers are exactly
where value managers were back in early 2000, right at the point of capitulation," he
says. "Valuations of some solid names have come down dramatically."
Indeed, Pfizer and GE are two of the money managers' current favorites, an honor long
claimed by steroidal technology shares. AIG took top prize in the spring 2002 poll, with
eight votes, while other popular names included Bristol-Myers Squibb and AOL Time
Warner. Both have been severely depressed this year by concerns about earnings
growth.
That said, many Big Money managers also named General Electric the market's most
overvalued stock, a dubious distinction for which it beat out Krispy Kreme Doughnuts.
The knock on GE stems from the Enron mess, which served to highlight General
Electric's complex capital structure and reputed penchant for managing earnings. Doug
Ferguson, a money manager based in Sleepy Hollow, N.Y., likened GE, which operates
in dozens of businesses, to a closed-end mutual fund. "Closed-end funds sell at a
discount," he says.
The knock on Krispy Kreme, meanwhile, is the
doughnut-maker's price/earnings ratio: roughly 60
times this year's expected earnings.
Other "Seal of Disapproval" winners include tech heavy hitters Applied Materials, Cisco
Systems, Intel and Microsoft, as well as Amazon.com. A perennial favorite on the
"most overvalued" list, even after it had plummeted from all-time highs, Amazon has
rallied 118% since mid-September, its path greased most recently by a
better-than-expected quarterly earnings report.
Ever wonder how the managers pick stocks for their clients? We asked, and they
told. More than 20% of the Big Money folks say they look most closely at industry
prospects. Almost 15% rank price/earnings ratio as their top criterion, while 14% give
priority to earnings momentum.
The growth, or lack thereof, in corporate profits is the managers' chief concern these
days. Sixty-four percent expect profits to be the No.1 influence on stocks in the next six
months, with U.S. political and military action related to terrorist threats ranking a
distant No. 2. Roughly half of our correspondents think the biggest risk facing the
market is another downturn in the economy, while other concerns include fresh
accounting scandals, a continued lack of corporate investment and the build-up in
consumer debt.
Less than 10% of the managers expect interest rates to have a big impact on stocks in
the near term, presumably because they don't see an imminent change in rates. Most
think the Federal Reserve won't begin raising rates again at least until late summer.
The managers expect S&P 500 earnings to grow by
8% this year and 10% in 2003 -- modest by
comparison with earnings growth in 1999 and 2000
but a welcome change from last year's decline. Last
fall, however, they were wearing rosier glasses, and
forecast an earnings uptick of 11.7% in 2002.
Some managers think the recovery in U.S. profits will
trail those in Europe and Asia, which helps explain
the recent attraction of foreign markets. McKinley's
Lien, for one, likes Samsung Electronics, the Korean
electronics firm, which trades for 11 times this year's
expected earnings.
The U.S. dollar has been a pillar of strength in the
past few years, even as stock markets and alternative
currencies worldwide melted down. ln recent weeks,
however, the greenback is finally showing signs of
fatigue, as the Big Money pros duly note.
More than 60% of our respondents believe the dollar
will weaken against the euro this year, though only 42% predict a falloff against the
yen. Some 32% are outright bearish on the buck, almost twice the proportion of bears
in the fall 2001 poll.
"The U.S. dollar is substantially overvalued against the euro," says Ben Inker, director
of asset allocation for Grantham Mayo, Van Otterloo, a Boston-based manager of $25
billion. "The biggest problem international markets have had over the past 10 years has
been the strong dollar. A weakening dollar, coupled with generally lower price/earnings
levels overseas, makes foreign markets attractive."
Grantham Mayo has invested selectively in European stocks in expectation of a more
muscular currency. Inker says the firm has positions in Erste Bank Oster, Telekom
Austria and steelmaker Voest-Alpine Stahl, all based in Austria.
Grantham Mayo has also invested heavily in real estate and real-estate investment
trusts, or REITs, which now make up roughly a third of the U.S. equities portion of the
firm's global balanced fund. The Morgan Stanley REIT Index, an industry benchmark,
yields about 6.5%, which has enhanced REITs' appeal relative to other stocks and
fixed-income investments.
In keeping with their brighter earnings outlook, the Big Money managers expect the
nation's economy to perk up in coming quarters. They're looking for gross domestic
product to jump 2.97% this year -- a big change from the negative 1.9% growth rate
they predicted for '02 in the fall 2001 survey. Next year the managers expect GDP to
rise by 3.18%, although it's important to note that their predictions largely were made
before the late-April announcement of first-quarter GDP.
The managers believe short-term interest rates will edge up modestly in the next 12
months. They maintain that the yield on 90-day Treasury bills will reach 2.5% by
yearend and 3.127% by June 30, 2003, bringing short-term rates back to pre-Sept. 11
levels. Similarly, the yield on the 10-year Treasury note, now 5.05%, is expected to
climb to 5.7% by the end of the year and to 6.01% by June 30, 2003.
The Big Money crowd is suprisingly sanguine about the outlook
for oil, notwithstanding this year's escalating tensions in the
Mideast. The managers expect crude to fetch an average $24.68
a barrel this year and $24.36 in 2003, both lower than the
current spot price of $26.24 a barrel. Just 10% of the managers
think energy stocks will lead the market higher in the next 6-12
months.
Despite this year's still-worrisome earnings news, and an
increasingly common complaint that there's little left to buy in a
pricey market, 70% of the Big Money men and women are
beating the S&P 500 in client accounts. And 72% can boast the
same about their personal portfolios.
The Big Money managers plan to lift their equity allocations over the next 12 months to
a mean 75% of assets, from about 69% currently. They plan to lower their
fixed-income holdings to 17.4% of assets from today's 18.2%, and to cut their cash
stash to 7.7% from 12.9%.
Most encouraging, the managers seem to be reducing their expectations about the stock
market's ability to perform miracles. They've lowered their expected 12-month return
from equities to just under 10% from 19% in last fall's poll. |
