Gurus turn to high-quality blue chips

Scouring the investment landscape for insights from the brightest minds in the market.

By John Reese Dec 11, 2009 5:52PM

Over the past week, a couple of major themes have been prevalent in my studies of the market's best investors.

 

One is that many of gurus think values remain, even after the market's recent run-up. The other is that many of them think the best values are among high-quality, blue-chip stocks -- not the junk stocks that led the post-March 9 turnaround.

One strategist talking high quality is Bob Doll, Blackrock's chief investment officer for global equities. Doll told Bloomberg.com that he thinks the market is in a "transition phase", one in which it will evolve from a P/E multiple-driven market to one that is driven by the real economy and earnings.



Doll thinks the path overall will continue upward, but that it will be bumpier than it has been thus far during the rally. He recommends that investors make sure they have some higher-quality, less economy-dependent stocks in their portfolios -- not just cyclical plays -- as the market enters this new phase.

 

By way of background: why listen? Well, the investment world is filled with new theories about how best to make money. But over the years, I've found that the best way to produce solid, market-beating returns is to take advantage of the wisdom of history's best investors.

 

That's why I created my Guru Strategy computer models, and it's why each week I take a look at what some of the gurus I keep an eye on are saying.

 

Also touting high-quality stocks right now was Jeremy Grantham of GMO. Grantham tells Mark Hulbert of The New York Times that the big outperformance of junk-type stocks since the March low is in large part a by-product of the government stimulus efforts, which have helped bolster weak companies and encourage risk-taking in the market.


That has made high-quality stocks about as cheap as ever compared to stocks of lower-quality firms, Grantham says. “It’s almost a certain bet that high-quality blue chips will outperform lower-quality stocks over the longer term,” he predicts.

 

Another manager who's high on high quality: John Osterweis. While not as well-known as Doll or Grantham, Osterweis' Osterweis fund has an excellent track record, beating the S&P 500 by fairly wide margins over the past 1, 3, 5, and 10 years.


While Osterweis normally focuses on out-of-favor companies with weak but improving balance sheets, The Motley Fool's Chris Jones reports, he is now shifting his portfolio toward “mid-to-large sized companies with low debt levels that are capable of weathering prolonged economic headwinds.”

 

Osterweis says that the "fundamental economic backdrop has not changed materially,” despite the short-term improvements in markets and the economy, so he's targeting companies that could gain market share from organizations that become insolvent or are driven out of the market.

 

A couple of other managers who have bounced back strong in 2009 after being hammered in 2008 -- Bill Nygren and Bill Miller -- sounded quite bullish this week.

 

Oakmark's Nygren told CNBC that he’s “very positive” on stocks, in part because of high pessimism in the market, and that there are values “all over the place.”

 

Legg Mason's Miller, meanwhile, said while speaking at the London Stock Exchange that “the outlook in the US for equities is as good as it’s been for some time,” and that 2010 returns of 20% to 25% are “not beyond the realm of possibility”, Global Pensions magazine reports.

 

Of course, we're far from clear sailing in the markets, and Templeton Asset Management Executive Chairman Mark Mobius this week pointed to one potential trouble area. On his blog, Mobius said that he thinks India will be able to keep up its growth rate going forward, but that the country's overheated markets could lead to a “Dubai-like” situation or correction.

 

“I confess that many [Indian stocks] currently do appear to be rather expensive,” Mobius said. “With [the high] demand from Indian domestic investors, Indian stock prices have rebounded from their lows. Given the large amount of liquidity in the market, we believe a Dubai-like situation or other corrections in the market might surface in some areas further down the road if over-spending and over-leveraging go unchecked.”

 

Finally, commodities guru Jim Rogers made a somewhat surprising statement this week. He says he's been buying U.S. dollars, even though he's previously expressed serious long-term concerns about the greenback's health.

 

Rogers told Yahoo! TechTicker that he remains down on the dollar for the long haul, but that he thinks we could see a short-term bounce in the U.S. currency. Rogers remains a bull on gold over the longer term, saying that he thinks gold will reach "at least a couple thousand dollars an ounce sometime in the next decade."

 

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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