Stocks Are 'Underpriced': Value Investor

The equity market is "significantly underpriced," legendary value investor Marvin Schwartz, managing director and senior portfolio manager at Neuberger Berman, told CNBC Friday.

Marvin Schwartz
Marvin Schwartz

"The consensus for this year is $96 dollars a share in the S&P 500 and for next year there's a growing consensus of $105, $106 dollars," Schwartz said.

"If you put this in a price-to-earnings basis, the S&P is selling at about 12.1 times next year's earnings and 13.1 times this year's earnings," he said.

"For the last thirteen years its [S&P] sold at 21.2 times its earnings. For the last 40 years, the average P/E is 15.3. In that 40-year period, whenever interest rates were unusually low or inflation was unusually low, and corporate profits were rising, the multiple of the market was somewhere between 17 and 20 times," Schwartz said.

Among Schwartz's top picks is Hewlett Packard ,because "it's a mispriced stock."

"This is a tremendous cash flow generation machine. Every month they generate $800-900 million of free cash flow. This is a company with a four-and-half billion dollar debt," he said, adding, "They could wipe out the debt in six months, if they didn't make any acquisitions."

"I look upon it as a debt-free company. It's the largest technology company by revenues, not earnings, in the world. It gets 55 percent of its revenues from abroad, which I think is excellent and growing rapidly," Schwartz said.

Hewlett-Packard announced late Thursday that four board members were leaving and would be replaced by five new members, including former eBay CEO Meg Whitman, as new HP CEO Leo Apotheker remakes the company.

Schwartz is also a big holder of Travelers , a leading insurance companies.

Travelers Logo
Travelers Logo

But many analysts are concerned that the company will be hurt by its exposure to municipal bonds. As of late, the municipal bonds market has been leading the headlines because of the growing concern about a possible meltdown.

"Everytime there is a [Travelers] quarterly conference call it's the one thing that the analysts want to talk about. I'm not concerned about it because I have tremendous confidence in Bill Heyman [CIO of Travelers] and the people at Travelers who are making the choices on which municipal bonds to own," he said.

Travelers has a $70-plus billion bond portfolio, $41 billion of which is municipal, but $8 billion is prefunded, Schwartz said.

"The real municipal portfolio is $32 billion. I am not at all concerned about it," he said.

"It's a slow growth business, it's kind of a boring business, however Travelers generates close to $4 billion dollars a year of free cash flow," Schwartz said.

Free cash flow gives management options to accelerate the growth of the business by buying your own stock, by mergers and acquisition,s and by raising dividends, he said.

"Travelers is engaged in the largest share buyback program of any company that I know of. The company had over 700 million shares outstanding in January 2007, January 2010 they had 525 million shares outstanding. I'm estimating that they brought in 90 or 95 million shares for the year just ended—they haven't reported it yet," Schwartz said.

"This stock has the ability to go up substantially," he said.

In addition, Hewlett-Packard bought back 4 percent of its shares outstanding in the last quarter, Schwartz said, "They are shrinking the capitalization for the first time, pretty aggressively."

One of the biggest surprises in the economy over the past two years is the strength of corporate earnings, he said.

"The big picture are these tremendous corporations with the best balance sheets that they've had in the last 30 to 40 years. The amount of debt on the balance sheets of S&P 500 companies is at a 30- or- 40-year low," Schwartz said.

"There is very little within the United States, aside from the federal deficit, that should give one pause on the market. I would also add to that the unemployment rate," he said.

Web Extra: Schwartz on Anadarko Petroleum

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