Extended markets ran into resistance where expected this week, within the Sept. S&P 2810-2820 (S...
...And Barbara's Best Bullish Bets
06/30/2006 12:00 am EST
“The magnitude of this bull market since the lows of October 2002 has not been that great so far; that's one reason why I think we still have gains ahead,” says Barbara Marcin of Gamco Asset Management, who offers some favorite bets for the road ahead.
“The average length of past bull markets is about three-and-a-half to four years. We're still inside that average. The magnitude of past gains has generally been up over 100% and, in this one, we're up only about 60% if we use the S&P 500 as the measure. So I think that there is further to go.
“The positives include very strong economic growth, which continues to surprise on the upside and stocks that are selling at about 15 times bottom-up 2006 earnings, which is a very reasonable valuation. In addition, we have very good liquidity, with tremendous amounts of cash held by corporations and they are increasingly announcing plans to spend it. The rate of inflation, although up a bit lately, is still low. Taxes on dividends and capital gains are at the lowest level since 1941. That's a lot of positives.
“The two negatives have really been the same for the last couple of years. Those are interest rates, with the Federal Reserve in its tightening cycle and the price of oil. And, right now I am willing to be optimistic and believe that we are really in the midst of a mid-cycle slowdown with good growth still ahead. The economy continues to move ahead with some strength. So I think it's a good time to invest.
“One of the strong positives in the market is valuation. We've seen the stock market have single-digit, mediocre price appreciation over the last two years. In 2005, the S&P 500 was up about 4% whereas earnings were up about 14% year-over-year. That's the second year in a row where the stock market appreciation very much trailed the earnings appreciation. So the price-earnings ratio, or multiple of what investors are willing to pay for each dollar of earnings has been falling, and you are getting much better value built into the market.
“Now getting down to stocks, I think the overall market is really a good one for individuals to invest in here. The market delivers its returns in such an uneven way to get that long term average of 10% appreciation. That's why I think it's best for your portfolio to look at individual companies. If you like the company and it’s selling at 11 to 15 times earnings, has a long history of enduring franchise products, then I think that that's an easier way to invest.
“Sanofi-Aventis (SNY NYSE) is a nice one. The pharmaceutical companies are selling about 14 times earnings and are a good buy for the next couple of years. The problems they've had have bottomed out in the past year. The pipeline is still weak, but we're starting to see the outlook for new drugs improve. Recently we had an oncology meeting, which highlighted some positives for a number of companies such as GlaxoSmithKline (GSK NYSE) and Bristol-Meyers (BMY NYSE).
“Also, the falloff in the number of drugs coming off patent is peaking in 2006. The fear of more dramatic regulation is off the table with the new Medicare prescription drug benefit that started in January of this year. So, a number of problems are peaking here this year and the weak turns of the last few years are behind them. So I think these companies are a good buy going forward.
“Sticking with the large-cap quality companies with tremendous franchises and good balance sheets, you can put together a portfolio that includes General Electric (GE NYSE), DuPont (DD NYSE), JP Morgan (JPM NYSE), Citigroup (C NYSE), ExxonMobil (XOM NYSE), Home Depot (HD NYSE), and Time Warner (TWX NYSE). I think you can put together a group of these that pay good dividends and get an average multiple on the group of under 15— which has always been a good entry point.”
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