Stocks on Sale!
But Where Are the Buyers?
The tough economic conditions of the past many months have revived the love of the bargain among American consumers. Shoppers who once valued label over price tag have reversed their thinking. The pursuit of the bargain was not lost on retailers, who also have been creative in offering sales and incentives to consumers during the "Great Recession."
But the bargain mentality, it appears, has not translated to investor behavior when it comes to US stocks. Despite strong corporate earnings and stocks' attractive valuations, risk aversion has caused many investors to shun equities, potentially missing out on a tremendous buying opportunity
The investor disaffection for equities is evidenced by fund flows out of equity mutual funds and into fixed income. Morningstar reports that year-to-date through September, taxable bond funds took in nearly $190 billion in assets while US stock funds bled roughly $58 billion.
It is this aversion, together with a mid-year market correction, that has resulted in very attractive equity valuations. Take those low prices and factor in the strong corporate earnings reported recently, and it appears stocks have a great deal of growth potential going forward.
Bob Shearer, portfolio manager of the BlackRock Equity Dividend Fund, notes that, "Equity prices — especially for large-cap, diversified, dividend-paying companies — are not reflective of the strong cash flows and dividend increases we're seeing."
Indeed, high-quality companies like those Mr. Shearer prefers are trading at a 5% discount to the market and at a 15% discount to their long-term average, according to a Bernstein analysis. And, Mr. Shearer adds, these low-priced stocks come packed with potential.
High Quality, Higher Potential
US companies have been able to strengthen their bottom lines and build up their cash positions, even in a world of muted economic growth. S&P 500 companies (excluding financials) are sitting on more than $1 trillion, equal to 11% of assets — the highest level (on a percentage basis) since 1955, according to JP Morgan. Firms have already begun deploying their cash for investment spending, hiring, increasing dividend payouts and/or engaging in stock buybacks — trends that should continue and that bode well for the economy and for equities.
According to Mr. Shearer, "High-quality, dividend-paying stocks have attractive growth potential and relatively low valuations, which we believe should enable them to outperform."
Kevin Rendino, portfolio manager of the BlackRock Basic Value Fund and a career value investor, agrees and contends that the current market is misunderstood. "Investors see the macro headwinds and they question whether the positive market cycle we've been in since March 2009 can continue. We believe it can."
Mr. Rendino cautions against comparing this market cycle to the stock market of some 10 years ago. "Today's market is not to be feared. The time to be afraid was in January of 2000, because that market was up, but it was also expensive. We're not at that place today.
"We're finding as much value today as we've found in any other market cycle, and the quality of company that we're able to buy today at these kinds of prices is incredible. We're actually getting more for less — buying high quality for low prices."
* Archived articles are current as of the original date of publication.