COVER STORY: Still Betting on the Bull by Andrew Bary
Summary: Barron's ran a bullish cover story last summer; despite last week's selloff, they're sticking to their guns. In the 38 times since 1979 that the S&P 500 index took a single-session hit of 3% or more, the next 60 days has seen the index up 31 times, with an average gain of 6.9%. Private equity groups, sitting on record levels of cash and encouraged by seemingly endless low-cost financing, are likely excited by the opportunity the drop creates. Byron Wien of Pequot Capital still thinks the S&P could hit 1,600 by year-end, and says equities' 7% earnings yield compares favorably with the 4.5% yield on 10-year T-notes. Risks to the stock market include a slowing economy, global unrest, and weak earnings growth. But an economic slowdown could also be a boon if the Fed drops its rates down to 4%, a number some economists see by year-end. Barron's suggests investing in high-quality large-caps with diversified earnings streams:
- Citigroup Inc. (C) and Bank of America Corp. (BAC) -- they carry among the lowest P/Es in the banking sector, healthy yields (4%), and have lagged.
- American International Group Inc. (AIG) -- "arguably the world's best insurance franchise." It has underperformed in recent years, and Friday's earnings gave it a 4% boost.
- Pfizer Inc. (PFE) -- a few years ago it was the darling of the drug industry; now it trades for a cheap 11x P/E with a 4.6% yield.
- Proctor & Gamble Co. (PG) -- Morgan Stanley's Bill Pecoriello said last week it could rise from $63 to $78 in 2007.
- Coca-Cola Company (KO) -- it's as cheap as it was 10 years ago, and trades for 18x 2007e earnings.
- Berkshire Hathaway Inc. (BRK.A) -- the ultimate defensive stock. It trades for 1.5x book value and 18x earnings. Buffett will pounce on investment opportunities should the market tank.
Related links: Eight Long Ideas From This Week's Downturn • Something's Wrong Here: Where's the Fear? • Stock Market Downside Scenario Increasingly Likely