Research Roundtable

Dreman: All in all, I’d much rather be in stocks now than long-term bonds!

What’s the biggest threat to the stock market in ’07?

Trevisani: Inflation. And if we have a continued slump in housing prices, there’s the risk that consumers will start reacting. But I don’t foresee that as being much greater than in the recent past.

Dreman: A recession that’s induced by housing; manufacturing and other industries fall off. There’s also the geopolitical threat — more so an exogenous event that could come out of the blue and affect markets.

Fisher: There’s not much of a threat. If there is one, it’s probably something geopolitical outside of America that we don’t anticipate. There are a lot of tinderboxes that could blow at any point. We’re not really in a great position to do another warfront, and that could freak out the market.

Buckingham: It ultimately comes down to economic growth and inflation. If something geopolitical comes from left field, it would be very short-term, but nothing that would impact the market.

What about the threat of terrorism?

Dreman: We’re going to have a number of [potential] eyeball-to-eyeball confrontations with Iran, possibly North Korea. That won’t be good for stocks. But the [effects] will be short-term.

Trevisani: The threat is always there. But 9/11 provided an opportunity to invest in certain solid companies.

Will large-cap be outdistancing small-cap stocks this coming year?

Buckingham: Yes. Large-caps are finally going to match small-cap stocks — at least. When one sector has performed well for so long, like small-cap stocks, eventually the money starts to move toward the area that hasn’t performed as well.

Fisher: Since World War II, it’s been true that before a bull market is over, small-cap leadership has rolled over into big-cap leadership. I don’t believe the bull market dies until that happens. We’re close to the trade-off where big-cap takes leadership away from small-cap in a demonstrable way. But it usually doesn’t happen until people stop calling for it!

Dreman: If the economy starts to go down, we might see a move toward larger-cap stocks. Mid-cap stocks have actually doubled in price, and small-cap has almost doubled. Next year it will probably be more and more toward the large indices.

What sectors do you like for ’07?

Fisher: We’ll have a resurgence in energy stocks. Financial stocks will be fine, but they’ll be largely market-like, [though] the capital markets world will probably respond to a rising stock market and do well. I think we’ll get a resurgence in materials, in industrials. Regardless of industry, if companies that have high earnings yield relative to bond yield and strong strategic attributes don’t get their stock up, somebody else will do it for them [in takeovers].

Technology will be largely a market-like performer, or it might do a little better than that if we move into the period where big stocks do better than small stocks.

Dreman: I still like oil. It’s been battered lately, but it’s got a lot of potential: Demand keeps rising much more than new oil discoveries. I like Conoco and exploration companies, like Apache. Banking is still very cheap. We like Bank of America and Wachovia. Freddie Mac and Fannie Mae may come back some.

There’s promise in drug companies and other health-care stocks, such as UnitedHealth and Aetna. We like Eli Lilly and Pfizer, which is turning around and has a good pipeline of products.

The major technology growth stocks of the late ’90s aren’t growing very quickly anymore. There’s a major lack of new products. Dell Computer is [just] an assembler. PCs and laptops are becoming commodity products. There’s disappointment in dot-com companies.

Buckingham: We love tech! Almost half our buy list is technology. We like big-cap names like Microsoft and Applied Materials, which are trading at historically low valuations. We like small-cap, such as Dataram; also, Portal Player, which makes components.

Energy is still a growth area, and the stocks are so darn cheap. I like energy stocks independent of whether the price of oil is $50 or $70. I like Chesapeake Energy, a big natural gas producer, and in the drilling area, Rowan Company.

Housing is a terrific investment if you have a long-term time horizon. We still like homebuilders — DR Horton, for example, and the engineering and construction company, Building Materials. Another area is health-care: Pfizer is attractive, trading at 13 times forward earnings. And we like American Shared Hospital, which provides the state-of-the-art Gamma Knife. In retail, we own Home Depot, which has been a lousy performer. The theme here is valuation, valuation, valuation.

In the sexy area of homeland security, we’re [invested in] American Science and Engineering. They make detection devices and have been awarded a contract from the Department of Homeland Security for a nuclear-detection prototype.

What do you other panelists think about international investing?

Dreman: The investor has two problems: currency fluctuations, which can be a good part of gains or losses, and the companies’ fair number of bankruptcies, expropriations and so on, which U.S. companies don’t have to deal with. It’s much safer investing in the U.S. than most other countries in the world.

Buckingham: You can be right about a market but wrong about currency. That takes the stock analysis out of it and makes it more of a crap shoot.

Fisher: Emerging markets inherently have more risk. My expectation is that emerging markets do better than the market, but not by enough to justify the extra risk.

Ms. Trevisani, what’s your approach to international investing?

Trevisani: We look at the world. We don’t tend to be geographically- or industry-specific. We’re very bottom-up: We look for good names wherever they may be.

Where do you foresee the dollar and other currencies going?

Trevisani: The dollar should remain relatively firm if we keep putting up strong economic figures. It could go higher since rate cuts will be less likely — and the dollar hasn’t reacted significantly to the series of rate increases. We expect the Chinese yuan to track higher vs. other major currencies.

So is China a good place to invest?

Trevisani: Yes. There are growing companies and very developed cities. A lot of companies have become exporters. We perceive growth continuing, though it may be checked a bit by pressures to moderate the currency and get it a little stronger.

What about investing in Latin America?

Trevisani: They’re a big producer and exporter of oil and copper, so that bodes very well for their economies. Also, we own stock in American Movil, a Mexican cellular phone provider, and in Wal-Mart de Mexico. They’re entering rural areas, which are very profitable for them and have unmet demand. We also like the Brazilian regional jet manufacturer Embrear.

And in Europe?

Trevisani: Consumers are starting to come back in places like the U.K., which has been good for retailers such as Next [clothiers] and Tesco, which has a hyper-market [supermarket] format. We also like pharmaceuticals in Europe, such as Roche. In International, you can really find unique companies like Louis Vuitton, in the luxury goods space; and we also own the Frankfurt Airport.

In addition, we have auto companies Toyota and Hyundai, and the U.K. bank, Lloyds. Telecommunications is intriguing: We like Vodafone and France Telecom. These stocks are down, but we believe their valuations are extremely compelling.

ETFs are smoking. Are they on track to revolutionize the market?

Fisher: ETFs are great. Maybe they’re eating into the mutual fund business a little, but that business is huge. I don’t think ETFs accomplish one bad thing for the market.

Buckingham: ETFs have a big impact on our [industry] because the average Joe says, “Why do I need a mutual fund? I really like homebuilders [for example], so I’m going to buy homebuilder ETFs.” You get increased volatility: ETFs make it easier to pile into one sector.