'Quality' thoughts

Some of the market's top minds are finding big values in big, high-quality blue chips.

By John Reese Sep 3, 2010 4:00PM

Individual investors remain quite bearish, with the American Association of Individual Investors' latest sentiment survey showing 42% of respondents to be bearish on stocks over the next six months, well above the 30% historical average. But some of the world's most successful investors are finding plenty of value -- and a couple gurus are finding it in the same place: big, high-quality blue chips.

One of them is Whitney Tilson, the money manager and columnist who was one of the few to warn about the housing bubble before it hit. Tilson this week told CNBC that he's seeing some of the best opportunities he's ever seen in big, high-quality blue chip equities. At the same time, he says, a bubble is forming in high-quality bonds. Investors are "seemingly willing to accept any yield no matter how low on safe bonds, like treasuries, for example, and yet they have no interest in the safest blue-chip companies, with the strongest balance sheets," he says. "And the companies are doing quite well, so that's where we're steering our portfolio."


Tilson's not alone. Top strategists like Jeremy Grantham and Donald Yacktman have also touted high-quality blue chips in recent months. (While "high-quality blue chips" is a subjective term, Grantham's definition -- firms with high, stable return and low debt -- seems to be a good one.) And this week, hedge fund guru Byron Biggs also said he's high on such stocks. Biggs told Bloomberg that big, high-quality, U.S. stocks with global businesses are "incredibly cheap". He also says he sees a double-dip recession as unlikely, putting the odds of one at about one-in-five, and says it's not a time he wants to be underinvested in stocks.


A couple other gurus are finding big value in some very unloved areas of the market. Bruce Berkowitz, one of Morningstar's fund managers of the decade, continues to be high on financial stocks, including much-maligned firms like AIG and MBIA. In an interview on WealthTrack with Consuelo Mack, Berkowitz said that, having been incredibly scrutinized in recent years, financials now have strong balance sheets and excellent earnings power. And, he says, they are trading at extremely cheap valuations. Berkowitz also says he’s about two-thirds invested in equities, and has billions to spend should further stresses create new opportunities.


Another of Morningstar's fund managers of the decade, David Herro, is keying on another unloved area: Europe. While many others are focused on hot-growth emerging market areas, Herro’s exposure to emerging markets is just 7%, SmartMoney reports, showing Herro's contrarian streak. When a sector gets hot, he says, “people like the story -- and we avoid those.” He thinks European and Japanese blue chips offer better opportunities to get a piece of overseas growth, SmartMoney reports, adding that Herro has about 60% of his fund invested in Europe.


Finally, while many are fearful that the market's recent struggles are the start of another big leg downward, money manager and author Kenneth Fisher says it is instead “the most textbook perfect” correction he’s seen in a dozen years.

Fisher writes in his latest Forbes column that the last correction that was this textbook was the 1998 correction, which was fueled by the Asian contagion, the Russian ruble crisis and the Long-Term Capital Management hedge fund debacle. ” Like that one, this year’s minicrash had been pushed along by several scary stories that turned out to be nonsense but were nonetheless impossible to dispel,” Fisher writes, citing the PIIGS debt “hysteria” as a major example. Fisher says a double-dip recession is extremely rare -- and “simply inconsistent” with the strong earnings data coming from Corporate America.


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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