As the year comes to a close, portfolio managers are positioning assets with a look to 2012—and considering the state of the global economy, they’ve got an upward climb ahead.
The following opinions from a selection of portfolio managers set out their economic views, market predictions and investment strategies, with a view to tradable ideas for other investors.
Here, then, are picks and pans for 2012 from portfolio managers James Dailey of the TEAM Asset Strategy Fund, Neil Hennessy and Brian Peery of Hennessy Funds, Jim Oberweis and Ralf Scherschmidt of Oberweis Funds, Wilmer Stith of the MTB Intermediate-Term Bond Fund and Eric Marshall of the Hodges Small Cap Fund.
Many investors appear to remain in denial about the burgeoning global recession, while the sovereign debt issues in Europe and widespread policy intervention by central banks create a very challenging backdrop for investors. We expect the Federal Reserve to launch QE3 and for it to take place for most of 2012. The European situation is likely to end with significant amounts of money printed once Germany decides what role it wants to take.
Significant quantitative easing by most major developed governments in the face of a global recession is our base case forecast, which creates a very challenging environment for investors. Declining economic growth in real terms will be fighting competitive currency devaluations under our base case scenario.
Where to Invest in 2012: Our highest conviction long idea for 2012, which we believe to be very overlooked, is gold and silver mining stocks. The stocks, as a group on average, are trading at a historical extreme discount relative to the metals. Mainstream earnings discount models at large Wall Street firms continue to use out-year forecasts for gold and silver that are well below current prices; they expect gold to be $1,400 or lower in many cases.
We continue to favor the currencies of various countries with strong fiscal standing relative to the United States, members of the eurozone, the U.K. and Japan. A good example of this is the Norwegian kroner, as Norway’s finances are very resilient.
We also continue to favor select large blue chip high quality stocks in the United States, where valuations remain cheap on both a relative and absolute basis. Many also provide an added benefit of paying a significant dividend yield, with many yielding significantly more than long-term Treasury bonds and even the yield on their own corporate debt.
Emotions Are Driving the Market: Before Aug. 4, the Dow Jones industrial average did not have a single day when the index moved up or down more than 300 points. Since then, the Dow has experienced more than 12 of those days. What has fundamentally changed? Nothing. Investors are reacting to the nonstop barrage of negative headlines.
U.S. Companies Are Doing Well: Corporate profits are at an all-time high. Companies are sitting on mountains of cash—over $2 trillion among the S&P 500 companies alone. While companies are reluctant to hire they are deploying capital in other ways: increasing dividends, buying back stock, building internal infrastructure and making acquisitions.
The Market Is Undervalued: Whether looking at price to earnings, price to sales, price to cash flow or price to book, the market is significantly undervalued versus its five- and 10-year historical averages, and the last five to 10 years haven’t been that great. The market will move on the fundamentals, it is just a matter of time. For those with the guts to jump in, we think today’s equity market presents a huge buying opportunity.
Lower End Consumer Spending: We continue to see opportunities in the lower end consumer discretionary and consumer staples sectors. Look for consumers to continue the trend of “selectively shopping,” which we define as looking for great values on premium brands.
Look for the Bare Necessities: People are not going to stop using water or electricity or stop heating their homes, and chances are you’re never going to see your electric company have a 20% off sale.
Stock Picks: Wal-Mart (WMT): The company recently announced same-store sales that were up for the fiscal third quarter and it announced that revenues increased during the same period over 8%. Boeing (BA): The company has seven years of commercial plane backlog amounting to over 4,000 planes and its 787 is sold out through 2019. NiSource (NI): NiSource is an example of a stock within the Utilities sector that has very consistent operating income and a dividend yield that is nearly double that of a 10-year U.S. Treasury note.
When you look at the hard, cold data, it doesn’t look like we’re going into recession, but businesses that contain costs in this slow-growth environment will do well. We’re buyers of HMS (HMSY), a Medicaid audit recovery contractor.
Consensus for S&P 500 Earnings for 2012: Expectations are for earnings of $102, which puts the U.S. market at a very reasonable 11.7x 2012 EPS. These estimates do not look overly optimistic given companies earned at a rate of $101 in the third quarter.