If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
10/31/2003 12:00 am EST
In her introductory remarks, TV anchor Kathleen Hays joked that the "largest asset" acquired by Ryan, Beck in its former acquisition of Gruntal & Co. was analyst Joe Battipaglia –the 6’7" analyst, whose stature is equally matched by his reputation. Here are some of his latest market comments and top stock picks.
"We’ve heard a lot about the decline in the US manufacturing sector, a lot about the loss of jobs, and a loss in American prominence. I want to give you some facts to contemplate. Fact: from 1970 to today, including the recession years, American manufacturing output has doubled. Fact: Since 1990, American manufacturing capacity grew by 50%. Fact: According to the Federal Reserve Board, in 1947, 35% of the American workforce worked in manufacturing. Today, the number is 14%. So this trend towards lost manufacturing jobs has been going on for 50 years. It is not a recent trend.
"The greatest distortion I see today, and the reason why so many are having trouble defining the current market is because our measures are distorted. The S&P 500 index is driven primarily by the biggest companies' stocks with the biggest capitalizations. The Dow is greatly distorted by the price of the stocks within the index. In 1998 and 1999, the so-called top of the market, it was not a bull market in the broadest sense of participation. If you didn’t own the big names then you were left out in the cold. Most stocks languished during that period of great performance. But the indices told us something different. Now, what I see is a broad participation by a great deal of names. Look at the new high lists now, and suddenly you find a broad opportunity. So don’t get caught up with the distortions of the indices. It’s what’s underneath the surface that will drive your portfolio.
"Today, the large-cap index appears to be at ‘fair value’. But when we look at the broader market relative to Treasury yields, the fact that earnings are reaccelerating at double-digit rates, the fact that dividends and capital gains are getting the best treatment tax-wise in the history of the existence of these taxes, I am indeed quite bullish in a broader sense of where the markets can go in this period of time.
"Reports of the imminent demise of the debt-laden US consumer have been premature and exaggerated. In fact, statistics show that aggregate household income rose every quarter except one since the start of the recession. Consumption is also being helped along by near-record levels of wealth created by rising values of real-estate, bonds, and cash holdings. Companies including GE, Hewlett Packard, and Intel have all announced plans to step up capital spending next year. These anecdotal signs of improving confidence coupled with new data on investment spending suggest that the worst of this particular cycle is behind us and we should see a dramatic increase in capital spending in coming years.
"We see the US economy expanding at a 5½ to 6¼% pace in 2004 predicated upon continued growth in consumption and government spending with additional improvement coming from investment spending and global trade. We expect to see upside surprise in the economy translate into continued positive performance by equities, corporate bonds, and REITs. We reiterate our asset allocation preference for equities over bonds and maintain an 80%/20% weighting for aggressive growth portfolios.
"There’s new leadership in pharmaceuticals, and I really think it’s biotech and the small ones behind them–Amgen (AMGN NASDAQ), Genentech (DNA NYSE), Millennium Pharmaceuticals (MLNM NASDAQ), Xoma (XOMA NASDAQ). I also like a Canadian company, ID Biomedical (IDBE NASDAQ), based on the firm’s flu vaccine potential. In the device area, we like Guidant (GDT NYSE).
"In the financials, we think that the thrift industry is going to have a real tough time of it, with interest rates adjusting to where they are today. So we’d be looking at some of the bigger regional banks and the small banks in particular–Wells Fargo (WFC NYSE), Commerce Banks (CBH NYSE), Sovereign Bank (SOV NYSE), Hudson City Bancorp (HCBK NASDAQ), Synovus (SNV NYSE). Among the big brokerage stocks, Merrill Lynch (MER NYSE) and Goldman Sachs (GS NYSE) are due for another go-around.
"In technology, I’ve been saying that low cost producers and volume producers, will do well, and sure enough Intel (INTC NASDAQ) and Dell (DELL NASDAQ) have proven that to be the case. I still like them. But there are small companies too: Drexler Technologies (DRXR NASDAQ) MSC Software (MNS NYSE) Herley Industries (HRLY NASDAQ).
"Among REITs, where I see that occupancy is going to be important and where there is going to be rising cash flows, I would own Weingarten Realty (WRI NYSE), Healthcare Property Investors (HCP NYSE), and the Dow Jones Real Estate Index (IYR ASE), which is an exchange-traded fund (ETF)."
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