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.