If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Band's Outlook and Top Picks
05/23/2003 12:00 am EST
Richard Band’s newsletter, Profitable Investing, stresses value and safety. In introducing Richard, TV host and financial commentator Paul Kangas noted, "Richard is well-known for his bold and insightful forecasts, including a dramatic prediction in March 2000 that Internet stocks were about to crash. Since then, the Dow Jones Internet Index tanked more than 90%." Here’s his current outlook.
"Today, I’d like to look at not only where to put your money for the next few months, but also for the next three years, five years, and ten years, and even longer. But first we must deal with that threshold question: has the bear market ended? Here we are seven months after the October low and yet we are still debating this question. Has the market really seen its bottom? I want to suggest that even though the resolution is not there yet, and we can’t say for sure that the bottom is in, there is good evidence to believe that we have seen the major bottom for this cycle. And there are some indications now that the market is ready to embark on a cyclical bull market."
"A simple way to tell whether the bear market is over is simply to watch the S&P 500 index and see if we can break through that high in late November, early December, which is at about 954 on the S&P. That is the intraday high in early December last year. If we can break through that and then break through the previous high at 965 on the S&P 500, I believe we will be out in free and clear territory."
"Here’s a good way to assess if we are at a real bottom to a bear market. One tell-tale sign was that in July, at the first bottom of this market period, 917 stocks on the NYSE made new lows for the 52-week period. When we tested that level in October, even though the S&P, the Dow, and the NASDAQ all made lower lows, there were only 604 new 52-week lows. Then when we got to March 2003, when we tested the October and July lows, we had only 319 new lows formed on the worst day of that decline. So we went from 917, to 604, to 319 in March. So we had a pattern of declining numbers of new lows. And that has typically been a classic indicator over the years of a market that is bottoming."
"I’m concerned that so many others are bullish. I’m hopeful, but I want to see the proof. For now, I think we’re heading into a correction, and depending on the severity of that setback, we will have a better idea of where this market is going. If we have a shallow correction, I’m going to hit the buy button again. But for right now, I’m just sitting and watching. And there’s nothing wrong in this game with keeping the bat on your shoulder and waiting until you get the fat pitch."
CBS Marketwatch.com also caught up with Richard Band at The Las Vegas Money Show , to see where he stands between value and growth. Says Band, "We're always in a mix of stocks and fixed-income instruments, might-be bonds, money market funds, bank CDs. So we've always been about 35% to 45% of our portfolio in normal times in fixed-income. That's our anchor to windward. That's why we're always less risky. We might go 75% stocks -- if we're really bullish on the stock market -- but we're never going to be 100% in stocks or out of stocks."
"I think we've seen the cyclical low in the market. It was a classic rally in October 2002, coming during the mid-term election year, with a fair amount of geopolitical tension in the background. There's always something to frighten investors near a market low. This time it was Iraq. The concern over Iraq continued right up through the beginning of hostilities in March, so we had that secondary low in March. I think we're now in an upswing and the real question is how far does this thing go on the upside? Have we already used up a lot of our firepower? That's quite possible. It's possible we've already seen half of the bull market that's to come."
"Corporations have done a tremendous job of cutting costs, in the last two years, especially. You're seeing profit margins stabilizing and even increasing in some industries. So if we get just a little pick-up in the economy, on the sales side of the equation, a lot of that revenue will fall through to the bottom line. Corporate profits will expand and when that happens, investors will nearly always be willing to bid stock prices somewhat higher. What makes me cautious is that we're going into this cyclical bull market, if you will, with very low cash reserves in mutual funds. Cash reserves as a percentage of mutual fund assets are close to a 30-year low. So money managers have already made their bets. That doesn't mean that the market can't go higher. If the public puts new money into mutual funds, then of course the money managers can continue to buy stocks. But if we're expecting mutual funds to kick-start a new bull market, it's not going to happen."
"If you're looking for markets that might out-perform the US, look to markets like the Far East. I'm bullish on Hong Kong right now, for example, despite SARS. Hong Kong is selling at a fabulous price/earnings ratio, a discount of about 50% to the Standard & Poor's 500. The dividend yield is over 4%. Once that public health issue is resolved, I think you're going to see people moving back to Asian stock markets. Hong Kong, which is a way out of favor market. You buy the whole Hong Kong market easily through the IShares MSCI Hong Kong Exchange-Traded Index Fund (EWH NYSE). I would try to buy this under $7. This is one that I think could rise 50% easily in the next 18 months and I'm probably being conservative on that."
"I also like some of the utility stocks right now -- not only for income, but also capital appreciation. The ones that I like are kind of out of favor. These are companies that have cut their dividends. Normally, you'd want to stay away from utilities, or any other company, that cut its dividend. But in this case, I think you can find some diamonds in the rough -- utilities with basically good business models that may have over-extended themselves a little in the last few years. The two that I like are Pepco Holdings (POM NYSE) based in Washington DC, a very stable part of the country economically, and Alliant Energy (LNT NYSE), which serves several states in the Midwest. In both cases, these companies have cut their dividends -- but their dividends at their current level look to be safe and sustainable and you can earn 6% to 7%. And if these utilities do repair their balance sheets and mind their store, so to speak, the stocks could also rise. So you could get a nice capital gain as well as earning 6% to 7% in income."
Finally, in an InvestorPlace panel, Richard also selected American International Group (AIG NYSE) as a favorite. He says, "This is a controversial stock that is based in the US, but does a lot of business in Asia. This is the world's largest, strongest, and safest insurance company. They have huge operations in the Far East and they have already said that their second quarter would be somewhat on the light side due to SARS. But once that scare is over with, AIG is a money machine. In terms of profit margins they are probably among the most profitable of any insurance company in the world. The stock is now down in the high $50s (and had been $105) and is a good example of a blue chip that has been cut to down to size. I'd try to buy below $55 and look for it to run into the upper $60s or $70s before this mini-bull run is over sometime next year or early 2005."
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