Energy and industrial companies will rise next year, propelling a 17 percent gain in the Standard & Poor’s 500 Index from its current level, according to Cambiar Investors LLC’s Brian Barish.
Next year will be marked by a “multi-speed recovery” as industries weakened by the recession, such as financial companies, lag behind those that are healthy and have cheap valuations, Barish said in an interview. He said stocks will perform better than would be expected under the “new normal” theory of the economy championed by Pacific Investment Management Co., owner of the world’s biggest bond fund, which says growth will be relatively slow in coming years.
“The bleeding has stopped,” said Barish, who oversees $5.7 billion in assets as president of Denver-based Cambiar, including the Cambiar Aggressive Value fund, which has beaten 99 percent of peers over the past year. “The market multiple is very low on earnings, and it doesn’t seem that big a stretch to me to see that multiple expand.”
The S&P 500 has risen 75 percent since its low in March 2009 to yesterday’s closing level of 1,180.55 as confidence in earnings and the U.S. economy has risen. Its price-to-earnings ratio is 15, below the 16.4 average in data compiled by Bloomberg going back to 1954.
The S&P 500 will rise to 1,300 by June 30 and 1,380 by the end of next year, based on the weighted average of estimates by Cambiar’s nine analysts. The average prediction of six strategists surveyed by Bloomberg is for a rise to 1,337 in the S&P 500 by the end of 2011.
No ‘New Normal’
The structural issues affecting the U.S. and European economies that led to the “new normal” prediction by Pimco are “more of a bond buyer’s problem than an equity buyer’s problem,” he said.
“If the whole stock market were a bunch of commercial real-estate investment trusts, they’d have a great argument,” he said. “We shouldn’t confuse the stock market with the U.S. economy. Particularly outside the U.S., a lot of structural issues just aren’t there, and U.S. companies get a lot of their revenue from outside the country.”
Barish said there will be a “multi-speed” market in 2011, as stocks in industries such as energy, consumer products and agriculture advance because “the revenue profile for those businesses has snapped right back to where it was before the Great Recession.” financial and real estate companies may suffer because “it takes years, if not sometimes decades, for the economic landscape associated with bubbles to recover” he said.
’Roughed Up’ Investors
Barish said he thinks the stock market’s advance will be restrained until there’s a shift in asset allocation.
“I think you need people to get roughed up in the bond market to get things to change in the stock market,” he said. “People had blinders on when they looked at sovereign debt, and now the blinders are off” with Greece and Ireland getting bailouts from the European Union and International Monetary Fund, and others such as Portugal and Spain seeing their credit ratings cut and their fiscal stability called into question.
The Federal Reserve’s attempts to boost the economy through asset purchases are likely to fuel inflation, he said. An inflation rate above the two-year Treasury note yield, which was 0.46 percent yesterday, would cause a decline in the real value of money, he said.
Energy is “the most intriguing sector” for 2011, Barish said, because it is still recovering from the BP Plc oil spill in the Gulf of Mexico, which created “myopic selling” of stocks in the industry. Cambiar owns shares of Halliburton Co., Apache Corp. and Repsol YPF SA, Barish said, and his firm sees oil rising to $94 a barrel next year.
Outlook for Financials
Financial companies have a “really bad” revenue outlook because of restrictions on parts of their business, such as securitization of loans and offering credit cards, that boosted them during the bubble, Barish said.
“We own Bank of America Corp., not because we love it but because it’s selling for less than 60 percent of book value,” Barish said. “I wouldn’t touch the investment banks” like Goldman Sachs Group Inc. He said Cambiar has been “almost completely unexposed to banks since October 2007,” the month the S&P 500 reached its record of 1,565.15.
Regional banks can be attractive on a case-by-case basis, Barish said, and most of those he sees as good investments have low valuations. He said many of the banks that performed well had gone through crises in the past few decades, such as the Texas banks that suffered in the 1980s, because the companies learned from what happened.
Tech Balance Sheets
“It shows you the value of human experience,” Barish said.
Technology companies have too much cash on their balance sheets, and should avoid using it for buybacks because they “don’t work,” Barish said. He cited Cisco Systems Inc. and Apple Inc. as companies with war chests that are “just laughable” because they’re so big.
“The problem with buybacks is that they’re almost always timed badly” because they’re often done when share prices are relatively high,’’ Barish said.
Barish said Apple’s share-price advance may slow, because “when stocks get above $300 billion in market capitalization, they don’t tend to stay there,” with the exception of Exxon Mobil Corp. Apple, which has soared 48 percent this year, has a market value as of yesterday’s close of $285 billion.
Intel, Microsoft Corp. and Dell Inc. could suffer in the next year because the shift to small, portable devices driven by Apple’s iPad “will prove very disruptive to the PC market,” Barish said.
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