Can you make good returns in a lousy market?
If you believe a few respected money managers, there's opportunity aplenty in stocks now. If you find that surprising, wait until you hear where they think the bargains lurk: big blue chips that almost always fetch premium prices.
Legendary bear Jeremy Grantham of GMO LLC in Boston says the U.S. faces "seven lean years" of meager growth, but he has been pounding the table about blue chip bargains with big dividends. Steven Romick of FPA Crescent predicts rising taxes and an economic malaise but is singing the praises about "bigger is better" stocks now, too.
"If you're worried about a feeble economy you want to own companies with strong balance sheets," says T2 Partner's Whitney Tilson, who is loading up on big, multinational companies though he doubts the market will rise much for a while. "The beauty today is those companies are on sale."
Blue chips are always in the news. They're widely owned by pension funds and by individual investors in index funds, and heavily covered by Wall Street analysts. They're the companies that sell beer and medicine. They're the banks where people put their money. They make tractors and computer software. And they typically trade at premium prices, so sometimes are shunned by contrarians like the three above who have been bearish when others are bullish.
Better to troll in "more obscure waters" to find cheap stocks, as FPA's Romick explained to investors in a recent letter.
But now the bargains are staring them in the face — no trolling required.
Tilson of T2 Partners says Microsoft Corp. is a steal. Its stock has lost 4 percent in the past year, while the rest of market has risen. Yet the company has little debt, $37 billion in cash and dominates the operating system and software businesses, giving it pricing power competitors don't have. Translation: Customers won't flee if it has to raise prices in an inflationary environment or decide not to cut them as wages fall along with everything else in a deflationary one.
The kicker: You can follow in Tilson's footsteps and buy Microsoft's stock for 11.35 times the last reported annual earnings, or less than 10 times if you subtract cash from the stock price. Tilson says that's nearly the lowest ever. The stock closed Friday at $23.85, near its 52-week low.
Tilson's two mutual funds — Tilson Focus and Tilson Dividend — have posted annual returns of 4.2 percent and 7.7 percent since startup five-and-half years ago. The Standard & Poor's 500 is down 0.3 percent.
Tilson also recently bought Pfizer Inc., Kraft Foods Inc. and Anheuser Busch InBev NV, the world's largest beer company. As it turns out the latter is a holding of Romick's FPA, too. He notes in his letter that the company's big presence overseas means it can grow even when the U.S. is not.
"The stock market has jerked people around so much, they don't want any part of it But that's music to my ears."
Tempted? The Dow Jones industrial average of 30 big stocks, a proxy for blue chips, rose for a second straight week on Friday. But jitters over European debt troubles and slowing U.S. economic growth have taken a toll. The index is down nearly 7 percent from April.
Bill Miller, the chief investment officer at Legg Mason who beat the broader market for 15 straight years before a much publicized stumble recently, is jumping in. In a July investor letter he called blue chips "bargains," and urged investors to seize this "once in a lifetime opportunity."
Among Legg Mason's top holdings in its flagship fund, The Value Trust, are blue chips Goldman Sachs Group Inc. and IBM.
Of course, even if the pros are right that some stocks are cheap, they may get cheaper still. That's especially true in an age of computerized trading where everything tends to get swept up in the big market moves, and even sharpshooters picking off stocks one-by-one can get hurt.
"That style of investing isn't working now," says Cleve Rueckert, a strategist at Birinyi Associates, which has data suggesting stocks are moving in lockstep like rarely before. "When the market goes up, most stocks go up, and when it goes down, most go down. The traders are running the show."
Tilson, for one, isn't deterred.
"The stock market has jerked people around so much, they don't want any part of it," he says. "But that's music to my ears. To be a successful investor, you have to buy things that aren't popular."