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Stack: An Historical Assessment
10/15/2004 12:00 am EST
Jim Stack, editor of InvesTech Market Analyst, has an uncanny ability to forecast the market through a technical and fundamental analysis as well as an assessment of market history. Here, he looks at the bull market and highlights a contrarian sector.
"I think we are seeing a wall of worry. It’s not that the bull market is in trouble today; I think part of the problem is that investors have lost their perspective of what a true bull market is like. The bull markets of the 1980s and 1990s turned out to be two of the three longest bull markets of the last 75 years. So investors think a bull market should last seven or eight or ten years. If you look at the 16 bull markets—that is, defined by a 20% increase in the S&P 500— the median life span was 2.6 years.
"The current bull market is now two years old, so it is likely we are in the latter stages of the bull market. We are already starting to see some of the imbalances that commonly develop in aging economic recoveries, such as inflation pressures in the manufacturing sector. Once we get through the election and through year-end, any surprises in inflation and interest are more likely to be on the upside. Most bull markets die under a deteriorating monetary climate, where interest rates drive the bull market to its knees.
"So even though I think this bull market is still intact today, our strategy has been to start shifting to a more defensive, latter-stage bull market positions. Historically, the small-cap stocks do exceptionally well coming out of a recession, and they were stellar performers last year, which is where we focused our portfolio. Recently, we started shifting towards the mid-caps, where we think there may be a little more value.
"One of the most out-of-favor sectors this year is the pharmaceuticals. One of the obvious reasons is a fear of a Democratic victory in the White House, and that if that occurs, what might happen in regulations or controls that crunch the margins of these companies. However, look at price to cash flow— ignore the earnings, because they can be distorted by accounting, particularly coming out of a recession. And if you look at price to cash flow, which is the best intrinsic measure, you are going to find some of the best values in pharmaceutical stocks.
"We like Bristol Myers Squibb (BMY NYSE). It is selling at a substantial discount to its 20-year price to cash flow level. Its return on equity is 34%. That’s over twice the average return on equity for the S&P 500 index. And it’s kicking off a 4.5% dividend yield. That’s pretty darn good in the era of sub 1% money market funds. I think a holding like that going forward—particularly in a period I would call a rising risk market— will at least provide some stability with a real good potential for returns once we get through the elections."
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