CNN/Money  
graphic
News
graphic

Can the market run again?
MONEY checks in with four of Wall Street's top strategists.
January 23, 2004: 4:48 PM EST
By Amy Feldman, Stephen Gandel and Suzanne Woolley, MONEY Magazine

NEW YORK (Money Magazine) - If you haven't moved some of that mounting pile of cash into the stock market, odds are that after a 25 percent or so gain for Standard & Poor's 500-stock index in 2003, you're thinking hard about taking the plunge.

To get the most informed, thoughtful views on what to expect in 2004 -- and how to position your portfolio to profit -- we quizzed four of the sharpest money minds around.

Our topnotch team: Sanford C. Bernstein's Vadim Zlotnikov, ISI Group's Nancy Lazar, Banc of America Securities' Thomas McManus and Merrill Lynch's Richard Bernstein.

VADIM ZLOTNIKOV: THE WORRIER

Before becoming Sanford C. Bernstein's chief strategist in April 2001, Vadim Zlotnikov was the firm's chip analyst and tech guru. But if you think that background makes him keen on tech stocks, or more bullish generally, you're wrong.

The Ukrainian-born strategist is too smart, too value-oriented and too much of a worrier to be anything but defensively positioned right now. "You can only be good at this job if you are constantly worried that you are wrong," he says.

Picks of the pros
Strategist Picks 
Vadim Zlotnikov, Sanford C. Bernstein Allied Waste (AW) 
 Synopsis (SNPS) 
Nancy Lazar, ISI Group Diebold (DBD) 
 Motorola (MOT) 
Thomas McManus, Banc of America Alcon (ACL) 
 Boeing (BA) 
Richard Bernstein, Merrill Lynch Abbott Labs (ABT) 
 ConocoPhillips (COP) 
 Source:  MONEY Magazine, February 2004

Zlotnikov describes his market outlook as "lukewarm." Valuations are high, he says, and this isn't a normal recovery -- capital spending is too low as companies wait for pricing power.

He also points to looming issues such as a ballooning budget deficit and interest rates that are expected to rise. To those who recall Zlotnikov's warning of a shake-out -- at the height of the tech bubble -- this sounds like history preparing to repeat itself.

The upshot: Zlotnikov's strategy is modestly pro-cyclical, with an emphasis on more defensive names and on companies where small revenue gains can yield big profit-margin improvements.

The latter include garbage giant Allied Waste (AW: Research, Estimates) and paper-products company Boise Cascade (BCC: Research, Estimates).

He sees other winners in areas where the consensus view seems overly negative -- companies such as oil and gas giant Total (TOT: Research, Estimates) and reinsurers like RenaissanceRe (RNR: Research, Estimates).

And tech? Zlotnikov's research shows tech to be as overpriced as it was in March 2000, with 55 percent of tech firms valued at forward price/earnings ratios at least twice that of the broad market.

He's urging investors to shift from chipmakers to more stable areas such as software services, storage and semiconductor capital equipment. He likes Synopsis (SNPS: Research, Estimates), a maker of software used in designing chips, which he calls "one of the safer technology names today."

What would make Zlotnikov more optimistic? Companies gaining pricing power, for one thing. Or valuations that come back in line.

For now, he's worried: "We're in a relative-value market, and for investors that is enormously dangerous terrain." -- Amy Feldman

NANCY LAZAR: THE EBULLIENT ECONOMIST

The past year proved -- again -- just how good Nancy Lazar is. After turning bearish in 2000, Lazar and colleagues at forecasting firm ISI Group began predicting in late 2001 that a robust recovery was coming.

We all now know that economic growth topped 8 percent in the third quarter, and stocks took off in 2003.

But Lazar made those predictions, and stuck to them, in the face of rising corporate layoffs, accounting scandals and plunging stock prices. Sure, she was early, but that's the point of forecasting.

For 2004, Lazar's view is about as sunny as it gets. "This is one heck of a synchronized global recovery," she says.

Employment will boom. Budget and trade deficits will shrink. Companies will increase purchases of everything from computers to tractors. And when you factor out inflation, the economy will expand faster than it has in most of the past 20 years. World peace, anyone?

Lazar's most controversial call is for interest rates to stay put. Rates typically rise in an improving economy, but Lazar says low inflation will break tradition as a glut of goods staves off rising prices.

Another factor is China, which will suck up commodities and pump out low-cost goods.

All told, Jason Trennert, ISI's chief strategist, says the stock market will rise 16 percent this year.

In particular, Lazar thinks companies that sell equipment to other companies will do well. That's because a provision in Bush's 2003 tax-cut plan that allows companies to write off 30 percent of a capital investment when it's bought will expire at the end of this year.

Normally, companies have to expense assets on a set schedule, which can be as long as 30 years. A higher up-front write-off means the expenditure will be less of a future drag on earnings.

To translate Lazar's economic analysis into investments, Valu-Trac, a division of ISI, picked stocks using quantitative value measures.

On the list: Cisco (CSCO: Research, Estimates), which should benefit from increased corporate spending, and Diebold (DBD: Research, Estimates), which makes financial data processing systems.

Lazar is also a fan of firms that sell a lot of products overseas. The falling dollar has made American goods cheaper, and since increases in overseas sales tend to lag currency declines by 12 months, 2004 will be the year that companies benefit.

Cosmetics giant Estée Lauder (EL: Research, Estimates) and Motorola (MOT: Research, Estimates), which generate 37 percent and 68 percent of sales overseas, respectively, look attractive. -- Stephen Gandel

THOMAS McMANUS: THE SKEPTIC

Catchy market metaphors. A thicket of computer monitors. A bird's-eye view from high atop a gleaming skyscraper. They're what you'd expect with any high-profile Wall Street strategist.

What you can't expect from every market guru: prescient market calls and a willingness to go out on a limb.

That's where Tom McManus, chief investment strategist for Banc of America Securities, breaks from the pack.

Perhaps his most notable call: turning bearish on technology and telecom in early 2000.

McManus warmed up to stocks in late 2002, calling for a cyclical recovery in 2003. Lately, he's turned cautious again.

With the consensus view calling for growth of more than 4 percent in gross domestic product this year -- as bullish a view as we've seen since 1986 -- high expectations are built into the stock market, he says, leaving it vulnerable.

Right now, McManus places us in the second stage of a bull market. While the market's current run is driven largely by solid developments such as rising earnings, we're entering a troubling third stage, he says -- what he calls the "dessert stage, where it's fun but you pay later."

Investors who avoided the stock market out of inertia are starting to notice attractive gains and are driving stocks up simply by virtue of the weight of the money they're throwing in, he explains.

McManus still thinks that the S&P 500 can gain 7 percent this year. "But 2004 may have the first significant correction of this bull market, and that could take 10 percent to 15 percent off the average stock," he says.

It doesn't come as a surprise that McManus likes defensive plays -- slow but steady growers with yields of about 4 percent.

One pick: health-care company Alcon (ACL: Research, Estimates), which McManus calls "a pure play on vision." Though the stock nearly doubled in 2003, he says it's only starting to get the valuation it deserves.

McManus calls his other top picks "large-cap laggards"-- stocks whose steady if unimpressive earnings growth he says is being overlooked.

Laggards" that he likes include Boeing (BA: Research, Estimates), Colgate-Palmolive (CL: Research, Estimates) and ExxonMobil (XOM: Research, Estimates). -- Suzanne Woolley

RICHARD BERNSTEIN: THE BEAR

Most bearish strategists dissolve into obscurity. Time proves them wrong, or investors hoping for word of market riches, not doom, tire of their fire and brimstone.

Richard Bernstein, chief U.S. strategist at Merrill Lynch, is the exception, at least for now.

He's widely regarded as one of the smartest strategists around, despite the fact that he turned bearish in 1998, missing much of the tech boom and 2003's stunning stock market revival.

Of course, he also called the market right in three of the past five years. Now he thinks the market could fall as much as 18 percent in the next 12 months.

Q. You predicted that 2003 would be a bad year to own stocks, but the S&P 500 rose nearly 25 percent. What happened?

A. One, the market was in a very speculative mode, and two, the profit cycle turned. We identified both trends, though profits turned a lot more than we thought.

But we didn't put two and two together and say that would be fuel on the fire.

The reason we hesitated was valuation. We had a tough time believing -- and still do -- that a bull market was starting with valuations the way that they were -- or are.

A year ago people said our caution wasn't valid because the only reason the market looked expensive was that earnings were depressed.

A year later, after the strongest expansion in profitability, from trough to peak, in the postwar era, the market's P/E is still in the 20s.

And now we have the added problem that even the biggest bulls forecast slower growth this year. When profit cycles decelerate, risk aversion tends to increase. Companies cut spending and don't employ tons of people.

Q. Nevertheless, are there sectors that will do better than others?

A. It turns out that the most defensive sectors are the ones most underweighted by institutional managers.

There's a huge contrarian call, the biggest of which is consumer-staples stocks. The consumer staples on Merrill's Focus One list, which are the ones our analysts think will perform best in the next year, are Coca-Cola (KO: Research, Estimates) and Procter & Gamble (PG: Research, Estimates).

We also like the big drug companies. It's another situation where you have higher-quality, very undervalued assets.

Our analyst likes Abbott Labs (ABT: Research, Estimates) the best. And energy has all the makings of a long-term growth story -- barriers to entry, high cost of capital and rising returns on capital -- but it's underweighted by institutions and ignored by individuals.

They don't believe prices will stay high. But there's tremendous underinvestment in the sector's capital infrastructure.

Q. Where would you invest?

A. If your time horizon's reasonably short, look at big integrated oils.ConocoPhillips (COP: Research, Estimates) has huge refining capacity, and there's little of that around. If your horizon's longer, look at riskier exploration and production companies such as Nabors Industries (NBR: Research, Estimates). --Stephen Gandel  Top of page




  More on NEWS
JPMorgan dramatically slashes Tesla's stock price forecast
Greece is finally done with its epic bailout binge
Europe is preparing another crackdown on Big Tech
  TODAY'S TOP STORIES
7 things to know before the bell
SoftBank and Toyota want driverless cars to change the world
Aston Martin falls 5% in its London IPO


graphic graphic

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.