It's A Bull Market, Oh My!

Includes: DHI, HOV, MGM, NCR, SPY
by: Arne Alsin

Yep, it's a bull market. But it's hardly a heroic call. We've got easy money, moderate valuations, and a long runway for economic growth. Valuation is not worth debating, in my view. Even if interest rates back up a bit, it's easy to justify a market value at 18-20 times forward earnings, as long as the runway for growth is long.

Growth is the debate, really. If you agree with me that it's early in the cycle, you should be invested in stocks. The opportunity cost of being out of this market is just too great, as you can see from the performance of my Top Ten picks over the last two years, up 79% in 2012 and 42% so far this year.

I don't see any structural impediments to growth. Capacity is ample, demand is pent up. Housing will get better, the rent versus buy equation isn't even close; there's an energy boom, gasoline prices are falling. And then there's the debt issue; whoa Nellie, the fear mongers have been WRONG on this one. Compare our net debt ($12 trillion, per the COB) to GDP and you'll see we're comfortably in the reasonable zone, at 73% of GDP, and better than Germany and Great Britain, among others.

Look at history, too. Our best growth phases occur after leveraging up, post World War II (when debt was at 120% of GDP, yowza!), and when Reagan tripled debt as a percentage of GDP in the 80s. History is not on the side of the debt hawks (nor is common sense…or basic economics… or anything, really). Our worst growth periods (1970s, for example) coincide with fiscal discipline, with paying down deficits, when debt as a percentage of GDP dropped to around 30% or 35%. Jerry Ford and Jimmy Carter economics anyone?

Ignore the silly politicians. This bull market is about where we are in the business cycle (early). I'm betting on another double-digit year for stocks in 2014. And since I'm feeling feisty, how about a barnburner, a year full of rich IPOs, M&A activity and multi-baggers?

What's got me really excited is not the market per se, but the opportunity within the market. I can't imagine a better environment for a stock picker. Disruptive innovation is causing a re-imagination of every vertical. The life expectancy of a new entrant to the S&P 500 is about 15 years - down from 60 years a half century ago. To the savvy investor, all of this change spells opportunity. As in, really big winners and really big losers.

Top 10 Update

I won't list all ten picks for 2013 (you can review the record here), though I have comments on several of them. I like the homebuilders for 2014 and beyond. We're in an elongated real estate cycle and there will be years where we don't make much progress, but the gains available to the patient investor over the next several years should be considerable. D.R. Horton (NYSE:DHI) has a super balance sheet and an excellent land position, making it worthwhile long-term holding, while Hovnanian (NYSE:HOV) will likely provide you with multiple trading opportunities in the years to come. I'm guessing Hovnanian will do quite well in 2014, perhaps to $7 or so (like I said, a trading opportunity).

NCR (NYSE:NCR), my one and only double pick, has done well in 2013, up 52% from my recommendation. My two-year view is $45-60, and it could go higher, depending on how they execute on their 2015 plan. I'm surprised MGM (NYSE:MGM) is below $20, wow. I'm planning on owning this one to the second half of 2016, at least. The new development for MGM China in Cotai comes onstream then, coincident with the completion of a bridge connecting Cotai to the Hong Kong airport. We'll see if I'm right about the operating leverage in the MGM model; as of now I'm expecting earnings growth to justify a stock quote north of $40 by 2016.

Returning to the cave

I'll be retiring from these pages at year-end, and I don't know how much more I'll be able to post. So let me say now, while I have the chance, thank you to Seeking Alpha for providing me with a forum to test out and express a few ideas. Thanks to those who posted intelligent comments (pro or con) to my columns. And thanks especially to my followers, all 2,893 of you. You're definitely a cut above.

Disclosure: I am long MGM, DHI, HOV, NCR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.