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Navellier: His Strategy and Favorites
05/23/2003 12:00 am EST
"There is no doubt in our minds that we are now at the beginning of a great bull market run, one that could last for at least two years," says Louis Navellier, money manager, financial commentator, and editor of both MPT Review and the Blue Chip Growth Letter. His stock selection process starts with a database of 5,000 stocks, which he narrows down to a select list of buys.
"Our database of 5,000 stocks ranks every stock from A to F. The A's are the top 7% of our database. A's are strong buys, and for the most part make up the stocks that we hold in our portfolios (though we also hold some B's). We focus on buying pressure. When money is flowing into a stock, volatility goes down and the stock moves independently of the market. This is the most bullish thing that can happen. Last year, only the top 18% of stocks were A or B graded. Today, the A and B stocks are 30% of the database. What's happening to the market is that this breadth and power is expanding here. Well that is a very bullish development, which shows that money is finally returning to the market. So, quantitatively, the market is improving."
"When we look at stocks fundamentally, we look at eight different components. There is sales growth; that's important because when sales are growing the company is doing better. Profit margin expansion is a trademark of our market strategy. When margins are expanding, then earnings are growing faster than sales. That creates a lot of earnings surprises. We look at earnings stability. Stocks with steady earnings rank well. We look at earnings revisions; when analysts revise their estimates higher, they tend to do better. Earnings surprises are important. We've had the biggest earnings surprises that I've seen in 23 years in the last two quarters. We look at earnings momentum and acceleration, which is coming back in vogue now. We have return on equity, which is how well a company utilizes its capital and if it is investing its money wisely. And cash flow will be a big, big deal if dividend reduction goes through. We may change these factors from time to time. But for now these are the factors that are successful."
"Here is the most bullish thing about the market. The Wilshire 5000 is the largest index out there. At the end of February, the money market assets were at record levels -- 28.7%. Back in 1991, when money market assets were at 17%, the market eventually rose 80%. The last big bull market began in 1982, when liquidity also hit a record level. The truth of the matter is that a lot of money is returning to the stock market. In part this is due to volatility in bond yields, which is causing institutions to shift funds back into stocks. And there is plenty of money on the sidelines which can drive the market higher for a long time."
"Today, if you buy a 5-year Treasury security, you're going to get less than 3%. You can buy the Dow and get a higher dividend yield. If rates go higher, you will lose money in bonds but the stock might make money. They have these indicators on Wall Street called dividend discount models. They tell you where stocks are valued relative to bonds. The stock market, based on the S&P 500, is now at least 40% undervalued relative to bonds today, because the dividend yields are approaching bonds. Now that's without dividend relief. Imagine if dividends became progressively tax free. What's happening now is that Wall Street is becoming reliquified. After two years of leaving the market, money is finally coming back in."
"Another reason to be positive is the presidential election cycle. It is an odd anomaly in the market. Every four years is good, looking at a chart of the low of the previous year (the third year of the cycle) to the high of the following year. In 1991, the S&P went up 41%. In 1995, we went up 41%. In 1999, we rose 58%. And now, four years later in 2003 we're off to a very good start. This pattern is basically due to the fact that the president wants to get re-elected and will do what is necessary to make the economy perform well. There will be some stimulus coming and it will be aimed at the stock market. So far, we're up about 20% since the October lows, so I would guess that we have about 30% more to go."
"Overall, the market is very simple. It had outflows for two years, which means money was leaving the market. The dollar got weak, foreign investment began to flee, we saw massive mutual fund redemptions, etc. The market's been bouncing along the bottom. Dividend yields are now higher than intermediate term Treasuries. In other words, the Dow yields more than the 5-year Treasury. The market can't go lower. In the interim, you've had the best earnings come out in two years in January and February. Earnings will likely be accelerating here for the remainder of the year along with a surge in consumer confidence and a surge in business spending. We think this is the first inning of a great growth rally that will last for at least two to two-and-a-half years."
"Among individual stocks, I like generic drugs; my favorite is Teva Pharmaceuticals (TEVA NASDAQ). This is an Israeli based company, but 60% of their sales are in North America. We like Nissan Motors (NSANY NASDAQ) quite a bit; it's the most profitable auto company in the world right now. Its got a very strong product cycle and trades at less than nine times this year's estimated earnings. Among smaller cap stocks, some of our favorites would be Coach (COH NYSE), the handbag company. The company has very good quality control and has been doing incredibly well. We also like Tractor Supply (TSCO NASDAQ), a specialty retailer."