In particular, Trapeze (like many other value investors) have shifted their focus to undervalued large-cap stocks. The interesting dynamic here is that this is essentially the first time investors have been able to purchase such high quality companies at what many are deeming cheap prices. You'll recall that during the panic, cyclical and leveraged businesses declined the most and then subsequently rallied the most during 2009. High quality stocks were seemingly left behind and this theme has been highlighted by numerous managers and strategists including Jeremy Grantham, Legg Mason's Bill Miller, hedge fund manager Whitney Tilson, and many more.
Trapeze interestingly intertwines compelling valuations with contrarianism by highlighting the current investor distaste for equities. Just yesterday we highlighted how market strategist Jeff Saut viewed massive equity fund outflows as a possible contrarian indicator. Investors are fearful of numerous economic factors ranging from unemployment, to a double-dip recession, to deflation. This resulted in a stampede into bonds. Such positioning requires a dose of macro outlook and Trapeze's viewpoint appropriately falls in line with the "no double-dip" crowd.
It has been argued that, if one takes a longer term horizon to smooth out the fluctuations, equities can be viewed as long-term bonds with an earnings yield in lieu of a bond yield and often with a fixed dividend yield, mostly reliable, mostly growing. In the current environment if one takes, say, a 5-year horizon to even allow for the possibility of an interim double-dip recession with a lower stock market from a poorer outlook for earnings, stocks should still be the preferred asset class in that extended period.
Many investors have often quoted Warren Buffett in saying, "Be greedy when others are fearful." Investors certainly seem more fearful of equities than they have been in quite some time. While equities haven't experienced extreme declines in absolute value, many investors have traded in their stocks for the supposed safety of bonds. And the problem with that, Trapeze argues, is that cash is desperately searching for return and yield; something that is currently better found in stocks than bonds. They feel that eventually all of the cash and fixed income parked on the sidelines will seek higher returns, eventually ending up back in equities.
In terms of specific stocks, Trapeze offers Clorox (CLX), Aflac (AFL), Kroger (KR), Aetna (AET), Hewlett Packard (HPQ) and Jack in the Box (JACK) as some of the large-cap stalwarts that they've been playing. Additionally, they also continue to hold positions in Oracle (ORCL), IBM (IBM), Walgreens (WAG), Wal-Mart (WMT), Mastercard (MA) and more.
For the bullish case on equities, we highly recommend reading Trapeze Asset Management's second quarter letter to investors in its entirety. You can download a .pdf copy here.
In the end, it's an epic and ongoing debate: stocks versus bonds, risk versus reward. Add in your stance on the macro environment and the decision is essentially made for you. However, what Trapeze is trying to illustrate is that such extreme pessimism (among other factors) can be interpreted as an opportunity for contrarian optimism. We'll end with another quote from Trapeze's letter: "Like beauty, value and risk too are often in the eye of the beholder."