Lynch, Herro, and Mobius all sounding bullish
Several of the market gurus I follow -- including the great Peter Lynch -- are seeing big opportunities in stocks
A federal deficit crisis is looming, unemployment remains high, and the Federal Reserve has increased one of its key interest rates. But, while concerns linger about the economy, the investment gurus I keep an eye on have been sounding bullish on stocks over the past week.
Most notable among the top strategists who spoke out was mutual fund legend Peter Lynch, one of the investors upon whom I base my Guru Strategy computer models. Lynch, who retired as manager of Fidelity's Magellan fund in the early 90s after producing one of the best track records of all time, doesn't give a lot of interviews these days. But this week he opened up for the Israeli publication Globes, and he said that the so-called "lost decade" for stocks hasn't soured his view of stocks.
"The significance of the lost decade is very simple,” Lynch said. “Companies earn more than they did ten years ago, and they are traded at lower prices than they were then. There’s an investment opportunity here. There are companies on the market with good balance sheets and wonderful reputations, that make better profits today than ten years ago, and will continue to grow. This is an extraordinary period for investment.”
Also sounding bullish was Morningstar domestic fund manager of the decade David Herro -- and he's bullish on some unlikely places, including Japanese stocks, luxury good makers, and even much-maligned automaker Toyota. “One of the secrets, I think, to successful long-term investing is to really look for where the true values are,” Herro told Bloomberg in explaining this contrarian bent. “And where the true values are usually is where the momentum is not.” Along those lines, Herro also said he's underweighted the popular BRIC nations.
Templeton Asset Management's Mark Mobius thinks Latin American stocks -- including those of one of the BRIC nations, Brazil -- are getting ready to pop, however. He expects the Latin American market correction to end within a month, and says the region’s indices may well climb to new highs by the end of 2010. Bloomberg reports that Mobius is buying stocks in Brazil, Mexico, Peru, and Colombia. He also plans to add Chilean stocks “at the right price”, and is considering private equity investments in the region.
Columnist and money manager John Dorfman, meanwhile, is bullish on the U.S. market. “I think the stock market was undervalued even before the recent sell off,” he told GuruFocus.com. “Yes the market P/E is around 18 but only because it is based on trough earnings. [And] now, with the correction, valuations have come down a bit." Dorfman also has a positive outlook on the economy, pointing to positive leading indicators, two consecutive quarters of GDP growth, increasing auto sales, and rising technology orders.
Wells Capital Management's James Paulsen is also bullish, though he says inflation could pose a problem for stocks. He told Barron's that he thinks we are in the early stages of a “robust economic recovery”, and that it is a “reasonable possibility” that the S&P 500 rises about 25% higher than its current level at some point in 2010. Paulsen sees one of two possible scenarios playing out for stocks. First, he says there's a better than even chance of a prolonged secular bull market -- if inflation is held in check as the recovery progresses. The second option involves a strong recovery and stocks moving toward their all-time highs -- and major inflation, which would lead to rate hikes that would "choke off the recovery,” he says. Under that scenario, we'd see a trading-range market, with the new highs setting the upper band of the trading range.
Nobel Prize-winning economist Joseph Stiglitz is more concerned about the economic recovery. Stiglitz told Yahoo! TechTicker that he thinks the U.S. will need another stimulus package, or else it will risk having high unemployment “through the middle of the decade” and a weak economy for the next several years. Without a second stimulus, Stiglitz says there is a real risk of a double-dip recession. The second package should focus on state revenue shortfalls and job creation, he says.
A new economic development, meanwhile, involved the Federal Reserve hiking the discount rate on Thursday afternoon. But while some fear that's a sign of an earlier-than-expected tightening of other key interest rates, bond guru Bill Gross of PIMCO says otherwise. Gross told CNBC he doesn't expect the Fed to move the Federal Funds rate for at least six more months. He also said he thinks the yield curve will steepen, not shrink, as some fear. Gross says continued low rates are a good sign for stocks.
John Reese is founder and CEO of Validea.com, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book, "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".
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