Opportunity in megacap stocks
Presented by: Scott Noyes
During a conference call with Will Danoff, the lead manager for Fidelity Contrafund and the Morningstar Domestic Fund Manager of the Year, he mentioned one strategy that he had been using for many years. He said, ‘in difficult markets, I like to improve the overall quality of stocks in my portfolio." By this he means, acquire stocks in the largest, most credit worthy firms such as Exxon, Procter & Gamble, Pepsi & Boeing. I was surprised at this thought since many of these mega cap companies have lagged the overall stock market since the 1996 to 1998 market rally.
But after further thought and consideration, buying high quality mega-cap stocks makes sense in our current economic environment for several reasons:
4.The cost of capital for top rated companies is substantially lower than for stocks with weaker ratings. Borrowing rates for AAA companies are very low, approaching 3.5% for 5 year bonds; while BB rated companies are forced to borrow at 8% or more. This affords quality companies the opportunity to acquire smaller and riskier firms at cheap prices. This is a tremendous cost advantage that should last at least for a while. Most mega-cap companies are broadly diversified internationally. This affords them the opportunity to benefit from the worlds changing demographics and growth trends. US mega-cap stocks are cheap for foreign investors. I believe that if the dollar turns, there will be a major push from foreign investors into the US equity market, with US high quality mega caps being a major beneficiary. Relative safe haven. If the market continues to retrench, the mega caps could be a relatively safe haven when compared to foreign stocks or US small cap stocks.
A Very Rough Quarter
Since December 31
Index Quarterly Return
Dow Jones Industrial Index -7.0%
S&P 500 -9.4%
Russell 2000 -9.9%
MSCI World Index -8.7%
Emerging Market Index -9.8%
DJ Commodity Index +9.6%
LB Aggregate Bond Index +2.2%
Money Market Funds +0.8%
As you may recall, our 2007 year-end comment was decidedly bearish and we generally positioned our clients according. The key events that evolved through the 1
NOYES CAPITAL MANAGEMENT, LLC
While the economy is slowing and is probably in negative territory, the media hype surrounding this market decline has been greatly exaggerated. The core economy and employment remains resilient. The positive news is that the Federal Reserve, Congress and the Administration are reacting in a proactive manner. There are several stimulative economic proposals in the works that should help re-liquefy the mortgage market and stimulate the economy. In my opinion, the fear is out of proportion to the risks that we are facing.Retirement Planning, Financial Planning, Investment Management www.NoyesCapital.com 973-267-8120
Our Investment Strategy
We believe that the stock market has become overly worried. Over the next ten years, the S&P 500 is likely to double in value. We believe that the market is due for either a bounce or bottom in the stock market and US dollar. As stated earlier, we believe that our equity exposure should lean towards US large cap and quality stocks and credit exposure should be focused in bonds. We believe that at some point in the next quarter there will be a substantial move out of money market funds and back into quality stocks as investors level of fear recedes.
Our overall investment strategy is to be fully allocated in large-cap and mega-cap stocks and slightly underweight in small cap stocks and international stocks. Our bond positions favor higher risk bonds where we are paid to take some risk.
We still believe that the economic slowdown is likely to last for several years. The national "have- it-all-now" philosophy using borrowed money will ultimately have to be corrected at a federal level, municipal level and individual level. Living on borrowed money ultimately leads to bankruptcy.
Our overall investment strategy for 2008 is to remain patient and invested according to your Investment Policy Statement.
upcoming quarters.However we are likely to see a shift in the performance of asset classes as some previously leading sectors suffer and new leaders materialize. Sector allocation and fund manager selection will be keys to performance in NOYES CAPITAL MANAGEMENT, LLC Retirement Planning, Financial Planning, Investment Management www.NoyesCapital.com 973-267-8120 I strongly believe that a diversified portfolio should continue to perform well over the long-term. I remain optimistic that 2008 will be a successful year for investors.
Scott P. Noyes, CFA
________________________________________________________________________®, CFP® is the President of Noyes Capital Management, LLC, an independent fee-only wealth management firm based in New Vernon, New Jersey. See www.Noyescapital.com.
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