Last week in an exclusive interview with AdvisorOne, Ken Fisher, founder and CEO of Fisher Investments in Woodside, Calif., talked at length about his investing outlook prior to Japan’s devastating earthquake and tsunami and nuclear plant crisis.
On March 16, as the humanitarian and economic effects of the crisis were still being gauged, Fisher updated the in-depth interview by telling AdvisorOne that he had made some changes to his portfolio holdings.
Fisher said that he had “increased weight in Japan and picked up some other things, mostly technology, on the presumption that things tied to [Japan] will” improve faster than many people think.
In the firm’s regular “weekly commentary e-mail, we said we think this is largely a tragedy that is being expanded in the media.”
“Rarely do people think they’re hysterical when they really are,” Fisher said, railing at media coverage of the unfolding tragedy in Japan—especially television. The story, he said, was being “reported as worse than things there really are.” The media needs to be “responsible about how they are reporting this—TV is fanning the hysteria.”
In last week’s interview, Fisher, typically an uber-bull, said he had shifted his forecast from a strong bull market in stocks to a flat one, dubbing 2011 a stock picker’s year. In another turnabout, Fisher, who's firm manages about $43 billion, has switched from a focus on emerging markets stocks to U.S. growth equities.
Developer of the price/sales ratio in the early 1980s, Fisher, 60, has been Forbes Portfolio Strategy columnist for 27 years. His latest book is Debunkery: Learn It, Do It and Profit from It (Wiley-2010).
Here are excerpts from the interview.
In an October 2010 interview with me, you forecast that the 2011 stock market would be “more bullish than most.” Now you’ve said you’re “somewhat neutral on the market.” What gives?
Remember Bill Clinton’s “It’s the economy, stupid!”? Well, “It’s sentiment, stupid!” — the bullish got bullish much faster than I ever anticipated. In October, when we had too many bears, I expected the market to rise. But I didn’t anticipate so many people would become so optimistic. There are too many bulls and too many bears.
What’s your outlook now?
A flattish market with more chop than direction. The juice from the mid-year elections has been expended.
So do you think the bull market is over?
No. And I’m not expecting a terrible year. It’s a transitional year preparing for the next leg of the bull market, likely in 2012. This is the year that refreshes before the bull market resumes with gusto.
You also said last October that investors should “always think non-U.S. before they think U.S.” Have you changed your view on that too?
Yes. This is a year of U.S. leadership. For the last couple of years I was very big on emerging markets stocks. Now — though I think their economies will do just fine — I’m underweight to emerging markets on a global basis. Too many people are too keen on them. Again, “It’s sentiment, stupid!”
Any other reason?
This year we’re going through a major rotation to the new leadership of the next leg of the bull market. We’ll transition into a world in which [certain stocks] have the ability to do well regardless of the economy.
What caused the rotation?
It’s the way most bull markets progress. Also, the optimistic people who weren’t so optimistic before start rooting around for opportunity — what smells like things that can grow. At this point, they’re not looking for a recovery-from-disaster story; they’re looking for a growth story.
How does being neutral on stocks change your investing strategy?
I see this year as one in which choosiness — being more definitive in your selection process — is of the essence. You have to do well by making correct bets on categories of stocks and single stocks — and be a good short-term timer, which I’m not. Categories will perform differently this year. So this is a picker’s year.
What sectors do you like?
I’m overweight energy. I see materials continuing to do well and to a lesser extent, consumer discretionary and technology. I like big pharma and the
higher-quality-perceived and growth-perceived parts of consumer staples. We’ll move more toward a world that appreciates firms that have good organic growth qualities.
What stocks do you like?
One example is semiconductor-maker Micron Technology (MU), a former high-flying stock now thought of as very doggy and selling at about eight times my expectation for this year’s earnings. It’s positioned itself as a strong leader in non-volatile flash memory, which is necessary to pretty much anything that’s mobile.
Another is International Game Technology (IGT), the leader in all forms of classic gaming machines. It’s gone through a successful turnaround and has real growth potential within the consumer discretionary sector. It could have a multiple upgrade and earnings upgrade at the same time.
And big pharma?
Drug stocks have done badly for years. Typically, they’re at very low valuations because they’ve been thought of as stodgy, haven’t had much growth and are without a pipeline of new, exciting products. But they already have drugs that the growing populace of baby boomers will need as they get older; so it’s a natural growth market. And they already have product to sell into emerging markets countries, which, over the next few years will continue to do well economically. The big drug companies can increasingly be seen as growthier and get their P/Es increased by 20 percent or 30 percent. Some examples are Bristol-Myers-Squibb (BMY), Merck (MRK) and Pfizer (PFE).
But wouldn’t many consider these to be value stocks?
Yes. It’s easy to see that. But for the reasons I’ve cited, they can be perceived as low-end growth companies. In the stock market, the difference between one and the other is a fair amount.
Half of investing is trying to figure out what reality is. The other half is trying to figure out what people are going to think reality is before they think it.