There's a 'Stealth Bull Market in Mega-Caps': Pro
While the European debt crisis continues to flare, China’s economy slows and U.S. economic growth remains, at best, tepid, U.S. equity markets are marching upward convinced the world’s policymakers will fix what ails the global economy.
The S&P 500 is up 11 percent year-to-date and has hit levels not seen since 2008. For August, the S&P is up nearly 2 percent. (Related: Why Does the Market Feel Weird?).
Markets appear more confident that the European Central Bankwill move to contain the sovereign debt crisisand that U.S. and Chinese policymakers will take additional steps to stimulate growth. That has led the growth and cyclical sectors of the market like energy, materials and consumer discretionary to outperform so far in August, while defensive dividend payers like pharma and telecoms have underperformed. (Related: With Few Believers, Technicians Say Market Could Rally On).
But with the aforementioned risks still lurking and nasty surprises possible in Europe, many investment professionals are still making the case for sticking with quality, dividend paying large-cap stocks.
"There’s a bull market going on. I call it a stealth bull market in mega-caps," Bank of America Merrill Lynch’s Mary Ann Bartels told CNBC on Wednesday, noting the strength in the S&P 100 .
“One of the qualities (S&P 100 stocks) have is yield, but they also have quality and growth,” she said.
Jensen Portfolio's Rob McIver favors quality companies. “We don't believe we're out of the woods yet and the euro debt crisis really has yet to be resolved properly, but having said that, there are real opportunities in quality growth companies," he said in an interview.
He prefers high-quality companies that despite the headwinds and the challenges in the global economy have the durable competitive advantages for creating business value and shareholder value over the long term.
McIver likes Colgate-Palmolive , syringe maker Becton Dickinson and Amphenol , a maker of electronic and fiber optic connectors.
“These are very high return on equity businesses, with strong cash flow — which is very important to allow the companies to produce good returns for shareholders in good times and bad,” he said.
Hunting for yield also still makes sense. “In a low-growth world, income matters a lot relative to total returns,” Mark Luschini of Janney Montgomery Scott told CNBC. He favors big-cap dividend payers and would move away from global companies to those that get more of their earnings domestically.
“The U.S. economy is the cleanest shirt in the hamper and I think with stable, if lackluster, domestic conditions persisting, domestic-oriented companies will continue to see steady if not rising profit growth,” Luschini said.
RiverFront Investment Group’s Chris Konstantinos also favors dividend payers— particularly stocks that look like bonds. He leans toward stocks with “strong stable earnings per share growth and more importantly, strong dividend growth trends.”
He likes Pfizer , Merck , Johnson & Johnson , Wal-Mart and Oracle .
“I think there is room even here for certain cheap secular growers like Qualcomm , EMC and Apple that have a company-specific story that can power through what is happening in the economy,” he added.
But with investors piling into dividend stocks, some industries like utilities and REITs have gotten expensive. “U.S. utilities, a sector that typically trades at a 25 to 30 percent discount to the market, currently is trading at a premium,” noted BlackRock iShares Group's Russ Koesterich in a CNBC interview. “Why? It’s a dividend paying sector and it’s a low-beta sector.”
He added, “We’ve seen this rush into safety and yield. There are some areas that still represent value but there are certainly places like U.S. utilities and potentially REITs which are looking pricey.”