After the fall, a large cap boom
Star strategist Jason Trennert believes that after years of sluggish performance, the slumbering giants are ready to roar. Fortune's Corey Hajim reports.
(Fortune Magazine) -- With Tuesday's market free fall - the Dow Jones industrials dropped 416 points following a 9 percent drop in stock prices in Shanghai - and Greenspan hinting at a possible recession, it might look like a good time to get out of stocks.
But Jason Trennert says big caps are ready to rally. Trennert, 38, who spent the bulk of his career at research firm ISI, was rated one of the best market strategists by Institutional Investor for four years. He left ISI in 2006 to open his own shop, Strategas Research Partners.
He notes that so far this decade, big-stock returns have been worse than they were in the 1930s. No, that's not a misprint. Major stocks (measured by the Ibbotson Total Return index) have returned an annualized 2.3% since the beginning of 2000. During the dark days of the Depression, from 1930 through 1939, they returned 5.4%. Trennert sat down with Fortune's Corey Hajim to discuss his outlook.
Is the market telling us the economy is as weak as it was in the '30s?
No. The recession that we had in 2002 was very narrow, and both fiscal and monetary policy were very good, much better than in the '30s. Productivity numbers have been exceptional, tracking to be the strongest that we've had in 50 years; unemployment's very low; and home-ownership and consumer net worth are at record highs.
So why have stocks done so poorly?
I think the reason is pretty obvious. It's a lingering hangover from what was a pretty incredible party in the late '90s. The decline has been commensurate with the ascent that we saw in the late '90s.
Since earnings have been rising much faster than stock prices, does that mean stocks are now cheap?
They're about 15 times forward earnings, which is about average. But I feel very strongly that multiples should be higher than normal because the fundamental nature of the economy has changed. It's less cyclical. We're in businesses like finance, like marketing, distribution, which are less subject to the vagaries of wild swings in economic activity. Another reason I think multiples should be higher is margins. If you look at corporate profits as a percentage of GDP, they've never been higher.
Are the low multiples making companies attractive to private equity?
The average CEO has kind of been in a fetal position for the past five years, basically trying to stay out of trouble and hold on to his job. There's been more of a focus on cost cutting, operating leverage and building up cash balances. And certainly part of that is understandable, but it's essentially putting a big bull's-eye on their backs for a lot of people who want to realize shareholder value. In the next couple of years, restless shareholders, led by a lot of activists and private-equity funds, are going to say to CEOs, "It's use-it-or-lose-it time."
Which sectors do you see as the most attractive for investors right now?
Most of the cash that is being underutilized is in the largest-cap stocks, and three sectors in particular: energy, health care and especially technology. The average company in each of those industries has twice as much cash on its balance sheet today as it had ten years ago. Our favorite sector is technology. For one thing, it's the most beaten down. It's where the bubble was, and people are fearful of getting back into the sector that caused so much pain in the first place. One problem with tech is that whatever competitive advantage you have tends to be relatively fleeting. But one thing we like is that it's the most global sector: Sixty percent of technology's revenues come from outside the U.S.