NEW YORK (Money Magazine) - Lisa Shalett has Sanford C. Bernstein blood coursing through her veins. That is, she's a value investor through and through, in the most Benjamin Graham way.
| Wall Street's take on 2003
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So it's no wonder that when it came time last November to find a replacement for the research firm's departing chief executive, Sallie Krawcheck (who headed off to Citigroup), Shalett was the obvious choice.
Like Krawcheck, Shalett had been one of Bernstein's star analysts (she covered heavy machinery) and until last November held the coveted position of director of research, overseeing Bernstein's crack team of independent-minded analysts.
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| Lisa Shalett, Sanford C. Bernstein |
Shalett describes herself as "very bullish about 2003." It's not that she thinks the stock market is dirt cheap. But valuations are fair, she says, and given her economic outlook, fair is great.
One reason for Shalett's optimism is that she expects consumer spending to stay strong. "Consumer-debt levels in relation to total incomes have come down in the past year, so consumers will continue to spend," she says. In the same vein, companies have been cutting costs, tidying up balance sheets and improving cash flows.
That mix of continued consumer spending and increased corporate productivity will result in double-digit earnings growth this year and a 15 percent to 20 percent increase in the S&P 500, says Shalett.
Will we see any impact on the financial markets from President Bush's new economic team? Shalett doesn't expect any policy changes but notes that the new advisers "are pure marketers, which Bush needs now as the chorus rises that he's ignoring the domestic scene."
Braving rough seas
When asked what sectors will lead in 2003, Shalett picks (brace yourself) tech and telecom. She notes that several large telecom companies such as Verizon, SBC and AT&T have been reducing their debt and are seeing improved cash flows.
| 1-year return through Jan. 17. P/E based on estimate for next fiscal year. Growth from current estimate to next year's estimate. | | Source: Baseline |
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Even troubled European carriers like Deutsche Telekom and France Telecom ("one of the bigger basket cases in the last three years") are getting their act together.
"Once they begin to clean up their balance sheets, they'll start spending again to find new growth opportunities," Shalett explains. That money, she says, will go to equipment companies like her favorite, Lucent. Not only has Lucent been slashing costs, but it has $4.4 billion in cash on hand. "You're buying the cash and getting the technology and products for free," she says.
On the tech side, Shalett recommends cyclical plays. It's too late to buy semiconductors, which do well early in a recovery. But companies that benefit from spending on information technology will prosper in 2003.
She cites the computer giant Hewlett-Packard, whose merger with Compaq has so far gone smoothly, and also likes services companies like Electronic Data Systems, which trades for 8.7 times estimated 2003 earnings. And she expects a rebound in software companies like Microsoft, SAP and PeopleSoft.
The two T's aren't the only areas Shalett favors. "We'll see a pickup in mergers and acquisitions and leveraged buyout activity, so capital markets-sensitive firms are interesting," she says. Shalett cites Goldman Sachs and Morgan Stanley, which derive 20 percent and 13 percent, respectively, of revenue from investment banking. An increase in investment banking activity isn't priced into the stocks, she says.
When told that someone pounding the table for telecom, tech and brokerage stocks might be seen as a little out there, Shalett laughs. "We like being counterconsensus," she says. "That's how you make money in the market."
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