BOROSON ON MONEY
John Longo believes that Apple remains a splendid stock, that residential real estate will end the year close to flat, that high-yielding investments will remain in favor. (One he likes: Schafer Cullen High Dividend Fund, yielding 2.6%.)
Dr. Longo is a clinical associate professor of finance and economics at Rutgers Business School, a principal in a $100 million hedge fund, and chief investment officer and chairman of the Investment Committee for The MDE Group (www.mdegroup.com), a registered investment adviser with $1.4 billion under management. The MDE Group was ranked the fourth best independent investment adviser in the U.S. by Barron’s in 2007 and 2008.
Here are this replies to specific questions:
Q. How far up (or down) will the S&P 500 be in 2012?
A. Election year politics will hold the market hostage – with sideways and volatile movements – until the results of the election become known. We believe the U.S. stock market will follow the pattern best illustrated by what occurred surrounding the 2004 U.S. Presidential election (Bush vs. Kerry). Namely, a volatile but range-bound market that will ultimately exhibit a significant move once the election results become known or widely anticipated.
We believe the market will increase post-election if the winners (President plus Congress) have a substantial, pro-growth platform -- while it may falter if it becomes clear that a continuation of massive deficit spending policies rule the day.
Q. Will residential real estate revive?
A. Real estate prices at the national level will likely continue to bounce along the bottom in 2012, ending the year close to flat. Markets with strong job growth (e.g., Texas, North Dakota, Silicon Valley) will likely experience price increases, while those still working off speculative bubbles (Nevada and Florida) will likely continue to fall, albeit at a lesser rate.
Low interest rates and modestly improving fundamentals will likely be offset by a continued large inventory of foreclosures, as well as the “shadow inventory” of homes that will be put on the market once prices rise.
Q. Which particular mutual funds might do well?
A. In a sluggish economy beset by gridlock, we believe yield-oriented investments will be an important theme in 2012.
Capture yield from alternative sources in a low-return environment for stocks and a low-yield environment for high grade bonds.
With short-term Treasuries and money market funds providing close to zero yields, we have had to search elsewhere for income-generating investments. In our view, there are a range of quality investments, such as the SteelPath MLP Alpha (6.5% yield), Loomis Sayles Strategic Income (5.9% yield), and Nuveen High Yield Municipal Bond (7.3% yield) funds. For equity funds, we like the Schafer Cullen High Dividend Fund (2.6% yield).
Q. Which particular stocks might do well? And why?
A. We’re bullish on Apple. The stock is cheap relative to its growth prospects.
- Forward price-earnings ratio = 10.6 times vs. 13 times for the S&P 500
- P/E to Growth (PEG) = 0.6 vs. 1.1 for Industry
- Projected EPS Growth: 22.7% per annum for 5 years
- $70 billion in cash & marketable securities on balance sheet
- Superlative brand name – “Halo Effect” for new products
- Most profitable retail stores in world (per unit). Strong growth ahead in U.S. and abroad (especially China)
- App Store very scalable and increasing in margins
- Steve Jobs has laid out a strategic plan that will last for many years.
- Will eventually use its mountain of cash to acquire promising technology or companies.
- Current growth areas in 2012: Rollout of iPhone 5, iPad 3
- Possible future growth area: “full blown” Apple TV
- Target Price = 13-15 times projected 2012 earnings of $32.53 = $425-$490 vs. $411 today
Q. Anything unexpected that might happen in 2012?
A. We think political gridlock will be a major theme in the U.S. and Europe for 2012.
- Pan-European gridlock drives continued volatility
- Financial markets performance will be dictated by the evolving European political scene, not by specific company performance.
- Political gridlock at home digs the U.S. deeper into the Hole
- Overindebtedness at both the governmental and household levels
- Long-term structural problems -- Social Security entitlement programs, financially unstable Medicaid, a Rube Goldberg tax code, federal debt likely to exceed $16 trillion by Election Day – go unaddressed
- Higher interest rates, increased taxes, and reduced entitlements lead to widespread social discontent
We also see social unrest continuing on a global basis. Indeed, Time named “The Protestor” as its “Person of the Year.”
Rather than die out, we believe these protests and ultimately social unrest will accelerate throughout the world as the further enactment of austerity programs and continued sluggish economic growth result in increasing economic despair for billions of individuals. The welfare state is in the process of being dismantled in Europe, with the stage being set for material reductions in entitlement programs in the U.S. after the 2012 elections. Asia will be beset with slowing growth, as its largest trading partners (Europe and the U.S.) struggle, and an increasing disparity between rich and poor that will ferment into social and political upheavals.