If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Dobbs: A Visit to Holland
12/26/2003 12:00 am EST
"Back in August, I invited Michael Holland, chairman of Holland & Co., to join our panel of advisors," says Lou Dobbs. "I invited Michael back to talk about his favorite stocks and the changes he’s seen in the market over the past few months." Here are highlights from that interview.
"I have a great deal of respect for Michael, in part because he and I share similar views on the market," says Lou Dobbs in hisThe Lou Dobbs Money Letter. "We both like good value. Michael’s three decades as an investment pro have given him a unique insight into the market’s behavior, which in turn has made him an extremely successful investor. Currently, he focuses his energies on his own fund, Holland Balanced Fund, in which he is the largest single investor. Mike shoots for 60% of his assets in blue-chip companies, and the remaining 40% in Treasury notes and fixed-income investments. His fondness for blue-chip names that minimize risk is evident in the 10 stocks he’s recommending here .
Lou Dobbs: Michael, welcome back. Since we last talked, the economy continues to grow, and the market continues to trend up. How do you feel about the economy and the recovery we’ve seen?
As far as all the recent economic data goes—the GDP, jobs growth, etc.—how do you think they are affecting the markets?
There’s no doubt that the surprisingly good economic numbers have had a very beneficial effect on investor psychology. And it has fulfilled the optimists’ desire that prices were in fact not way ahead of themselves. Prices were justified by the economic upturn and the profitability that US multinational companies are now experiencing.
We’ve come a long way since the bottom on October 9, 2002. Do you see any sort of mini-bubble here, or do you think that prices are justified?
The bubble is very contained. I think—given where interest rates and inflation are, and where profitability is—that the overall market is quite reasonable. I believe, as always, that there are portions of overzealousness and pessimism. In the overzealous category right now, or the 'bubble' category, you’ve got some of the crummy technology names that still haven’t gone under, which are up huge amounts. Those are probably an area where people, once again, could lose a lot of money. I should amend that to say that I think that technology overall is not in a bubble. The highest-quality companies—I’m going to mention two names here: Microsoft (MSFT NASDAQ) and IBM (IBM NYSE)—have done okay in the market, and they certainly are in no danger of being described as bubbling. I think that the large, quality companies are still very reasonably valued. The lowest-quality names, which have gone up the most, are the ones moving into bubble territory.
Is there anything you see—anything in the way the market is moving of late or anything that could be introduced into the market—that makes you either more bullish or more cautious?
This is just an observation, but it looks as if the many-year bull market in bonds ended back when the 10-year Treasury hit 3.1% several months ago. At best, bond prices and yield will stay somewhere around where they are now. At worst, bond prices will start declining, and yields will start going up more than we suspect over the next two years: Almost simultaneously with the bond bull market coming to an end, the worldwide bull market in commodities has begun. I’m not just talking about gold and energy; it’s virtually any physical commodity, whether it’s soy beans or copper. Virtually every one of these is up dramatically over the past year, and I think we’re in the early stages of a bull market in physical commodities.
So, what is your outlook for the US stock market in particular?
I think that the path of least resistance for the US stock market continues to be up. I think that the large-capitalization multinational US companies, the quality companies, have lagged with this current market and that they will provide some leadership over the next couple of years.
I’d say that’s a ringing endorsement for the markets and the economy. Now let’s take a look at some of the stocks you’re recommending as a way for investors to profit. If quality, large-cap multinational companies are where you see the opportunities, what ones do you like the best?
I will mention three: Johnson and Johnson (JNJ NYSE), IBM, and Microsoft. They are very much in the category of what I just described. Each is a world-class company. You’re talking about Tiffany-quality, top-of-the-line companies trading at very reasonable prices. These are stocks that have done OK in the recent market, but have lagged the small- and medium-sized, lower-quality companies, to some extent.
Merck has had a particularly tough stretch, and the stock is down 20% since you recommended it in the August issue. What do you recommend investors do?
Well, I wouldn’t be a seller. Everything that could go wrong for the company has. Right now it looks as if it’s priced like a tobacco company. The difference is that tobacco companies kill people and Merck is in the business to save lives. Still, at 13 times earnings, I’m not willing to say that it’s unattractive.
Final question: You also recommend Wal-Mart. There was a seemingly rare misstep in their earnings this past month. Is it still an attractive stock for you?
Yes, absolutely. The last time they misstepped was in 1994, if you can believe that. If I could have their last nine years all over again, I’d be happy to have it. (Including dividends and splits, Wal-Mart (WMT NYSE) is up over 400% in the last nine years.) I think they continue to take on challenges as the world’s leading retail giant in an incredible way, and I think they’ll continue to lead the retailing industry worldwide.
Thank you, Michael. We’ll look forward to talking with you again.
Michael Holland will be participating in Louis Rukeyser's Global Superstar Event at The World Money Show in Orlando, Florida, February 3, 2004. Tickets are $59.00 through January 22, $69.00 afterwards. Click here for more information or to purchase tickets.
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