Is This Really A Bull Market?

Includes: AMZN, MGM, NCR
by: Arne Alsin

Bill Gross, Gary Shilling, Peter Schiff, Jeffrey Gundlach, Jeremy Grantham, David Stockman, Nouriel Roubini: These extreme bears can't all be wrong, can they?

Check out the hyperbolic language of these guys (much of which appears to be lifted from a Tom Cruise movie script): Supernova, apocalypse, Armageddon, perfect storm, growth gone forever, and the "third phase."

Wow. Scary stuff.

Funny thing is, rather than get scared over the fear-mongering, investors should take comfort. Pundits are always too bearish early in a secular bull market. They're too focused on the recent past and its seemingly intractable problems. In the 80's, for example, we had hard-to-control inflation, 12-15% mortgage rates, the Cold War, and ongoing struggles with OPEC. Investors couldn't see past the problems and, as a result, didn't get enthusiastic about stocks until the late 90s, several years after the easy money had already been made.

This cycle is similar. Lots of silly pundits are predicting calamity (as I've written about before), each singing a variation of the same tune - it's all about debt, debt, debt. But the debt issue, like inflation in the 80's, is a lousy reason to be out of the stock market. Because of low interest rates, debt service as a percentage of GDP is 1.5%, half of what it was in 1989. And while rates will go higher at some point, I'm betting the rise will be modest. Powerful deflationary forces are very much intact and there is excess capacity in virtually every industry.

There is already good news on the deficit: We've seen dramatically higher tax receipts over the last several months (because of economic growth) and a rapidly shrinking deficit. The deficit will soon be well below 3.1% of GDP, the 40-year average, and is projected to shrink to 2.1% of GDP by 2015. So, relax. On the back of solid growth, we'll be close to a balanced budget within a couple of years. In the meantime, you should buy stocks.

Stock picks to consider

While I won't be posting new picks anytime soon, that doesn't mean I can't give you some profit-making ideas culled from picks already posted. I'm going to highlight some future big winners from 2013's list, but first, take a look at 2012's Top Ten list for context. This shows appreciation eighteen months after the picks were posted (as of yesterday).


It may be hard to believe, but as I look at 2013's list, below, which is six months old, I think there's a good chance it will be comparable in terms of performance to the list above. In other words, there's a lot more profit to be squeezed out of the list below. By my reckoning, eight of the ten picks below have a good shot at being up 80-100% a year from now.


Which picks have the most return potential?

Two have limited upside: I can't make a case for Berkshire Hathaway and General Electric being up 100% from the recommended buy price. The firepower is in the remainder of the portfolio - all eight of the remaining picks. I'll highlight three, very briefly (four, really):

NCR and NCR (Again): I made this stock a double pick as a way to emphasize the bargain, and I'm happy to report the stock is performing well. If you're an owner of the shares, you should review my original column from November, as it lays out the case, the price targets, and the timing. For you lazy buggers, here's what you need to know: MUCH HIGHER. (AGAIN).

Amazon: A lot of analysts can't figure this one out, which makes it doubly fun. Keep looking, boys. If you think this is just a retailer, you've got a lot of work to do. Hint: Words like grid, platform, toll bridge, gross merchandise sales, scale economies and total addressable market should be ricocheting in your brain as you dissect and analyze this model. I'll have more to say on this topic soon (book coming).

MGM: In my original work on this model I was too conservative regarding MGM's operating leverage. As the Q1 report showed, incremental revenue drops to the bottom line at an amazing clip (over 20%). I'm betting MGM will get to the $20's shortly (it should be there already), making it the first pick from 2013's list to achieve 100% gainer-hood.

Could be the first of many. Enjoy the ride.

Disclosure: I am long GE, MTW, TEX, HIG, MWA, AMZN, HOV, NCR, MGM, BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.