Research Roundtable

Dreman: Consumer spending is messy: they’re getting chopped by two or three factors. The middle class is pretty unhappy.

Fisher: Consumers are far from overspent and are very vibrant. People always think consumers are in terrible shape. All the folks who have been wrong about that before are still wrong about it.

Will ’08 be a big-cap or a small-cap year?Dreman: We’re seeing more of a movement toward large-cap, [even] some movement toward large-cap growth. But there’s been nothing new there since the late 1990s. A lot of companies with very poor records in the last seven or eight years are trading at pretty high multiplies — but they don’t have the earnings.

Fisher: This is more of a mid-cap market because that’s where you get both the takeovers and the takeoverees. Mind you, I define big as stocks with caps bigger than the average cap of the market, which makes them pretty darn big.

Buckingham: Small-cap has had such a great run that it was probably natural that large-cap would start to outperform, as it’s done this year. I expect that trend to continue.

What’s the biggest threat to the market next year?Trevisani: Recession. That, coupled with mounting inflation pressures, would [make] the market go down. If individuals can’t manage, certainly we’d be in for some pull-back.

Dreman: The liquidity crisis. It still has to be played out. It’s not only subprime mortgages. Private equity companies have about $300 billion in bonds to sell. It’s doubtful they’ll be able to sell them all in the next three to six months.

Buckingham: Outside of a terrorist event, if earnings don’t materialize or if things look like they’re getting far worse in terms of the economy, that would be cause for alarm for a good many investors.

Fisher: There isn’t a threat that’s particularly big. The issues are exogenous geopolitical ones. The threat of terrorism is always a possibility, though it’s never very likely [to occur].

How about the continuing housing meltdown?Buckingham: We don’t know how deep the downturn will be. But in the long run, housing is an area you want to invest in because the population continues to grow and people need a place to live.

Fisher: Housing will be weak, but it’s not big enough to matter — and everybody already knows about it. It’s already priced in.

Will the credit crunch yet be plaguing us?Trevisani: There’s still some fall-out to be had from matters like adjustable mortgages. That’s probably in the third or fourth inning, and it’s going to hurt in the U.S., particularly where housing prices are still very high. But it’s priced into a lot of stocks, especially those in the financial realm.

Fisher: I deny that there ever was a credit crunch! Utter nonsense! What we had were people floating cash and acting crazy in fear of a credit crunch. That’s bullish. We’ve had a subprime mortgage issue that rippled over into housing issues that people feared would become credit crunches.

What do you forecast for the dollar?Trevisani: If interest rates keep coming down relative to the world, it will create downward pressure on the dollar.

Dreman: The dollar is difficult. If foreign banks raise interest rates, as rumored, they’ll be fighting inflation more aggressively than we are; and that would drop the dollar. The more inflationary fires continue to pick up here, the more likely the dollar is to come down even more.

Fisher: Dollar doesn’t matter. Think about the period from March until now. The dollar has been terribly weak, and the U.S. stock market has been just fine compared to foreign markets.

What sectors do you like for next year?Dreman: We have a big position in oil — it’s a cash cow. The money the major oil companies are making is enormous. They’re trading at 12 times earnings — and the earnings are holding up extremely well. We like Conoco, Apache, Anadarko, Devon.

We like some tobacco — though we’ve cut down. Philip Morris will do well when they spin off their international portion early next year.

We have some banks. Two of my favorites are Bank of America and Wachovia.

We like Freddie Mac and Fannie Mae. They’ve been whipping boys for the Federal Reserve since they ran into accounting problems [a few] years ago. The Fed and the Administration froze their ability to expand and put very stringent standards on them. But they forgot all about the subprime people, who had no standards and caused real problems.

Freezing Freddie and Fannie actually did them a very good turn: Now they’ve got enormous surpluses. They can certainly bring more liquidity by buying the mortgages of many firms that have to sell their holdings.

Buckingham: We like tech, including Microsoft. Its balance sheet is fantastic: over $23 billion in cash. Another interesting company is American Science and Engineering. They have x-ray technology to detect explosives, etc., in container shipments. This is a way to hedge your other long exposure that might be hurt by a terrorist attack.

We like United Online, an Internet services provider; they also have Classmates.com, which in August filed to go public and could get a nice valuation.

We’re investing in financial stocks because they’ve underperformed for a very long time. We like Citigroup. Another sector we like, believe it or not, is energy — companies that are more on the natural gas side, such as Chesapeake Energy. We’re enamoured with its management team.

We also like retailers. One is American Eagle Outfitters, who’s done an excellent job of navigating the retail [scene] for those fickle 16- to 25-year-olds.

Fisher: In an environment where the economy does better than people think it will, materials, energy and industrials will do very well, as will the capital- spending part of tech. Most of tech spending is cyclical, just like industrials.

Dreman: I don’t see tech. We’ve gone through an almost 10-year period where not much is new. Except for Google and Yahoo!, the rest of the companies are pretty mundane. Normally a technology boom is led by major innovations. That’s not the case now.

Trevisani: [Internationally], telecommunications remains one of the most attractively valued sectors. We like the big telecoms but also the emerging-market wireless companies and tangential companies like Nokia, one of our top performers. We also like ARM Holdings, a U.K. company that makes phone components.

Recently, we bought some companies that we consider consistent earners, such as Nestl? and Danone. Another with strong pricing power is the luxury goods maker, Louis Vuitton, which has a broadening consumer base.

Health care is a pretty lively, though arguably unappealing, out-of-favor sector. However, we believe there are some gems in the rough — like Israel’s Teva Pharmaceuticals, the world’s biggest generic manufacturer, and the Danish Novo Nordisk, a leading supplier of diabetes therapies.

How about Latin America?Trevisani: We own the same stocks we’ve owned there for a long time: Wal-Mart de M?xico, American Movil, Embraer. So we’re not finding a heck of a lot of new value in Latin America. We’re seeing more opportunities for growth at a reasonable price in places like Asia.

China, for example?Trevisani: Yes, it doesn’t show many signs of slowing; it’s still a very unpenetrated market when it comes to goods and services. China has the largest economy in the world by population and is continuing to grow in wealth status. We do see some inflated valuations there, though.

About 10 percent of our portfolio is invested in China. Some very intriguing names that we’re going to own for a long time are: China Mobile; Country Garden — a property developer; China Merchants Bank; and Sinopec, also known as China Petroleum & Chemical.

Fisher: China is going to continue to be great until late in this bull market. The same way that tech rolled over close to the peak of the market as a whole, China and Asia will roll over. When you get to the very end, it will do badly. But the very end is probably after it’s done so much better so much longer than anyone can conceive. Remember: At the top, nobody thought tech was going down.

Buckingham: China has different accounting standards, a whole different way of looking at things from a governmental standpoint. Yes, China is exciting. But can companies actually make money there?