Following up on Aug. 27's "Return to Behemoth Stocks" we have another look at large caps.
From Barron's:
Kurt Feuerman: Why a Flexible Investor Likes Big U.S. Stocks
Kurt Feuerman is bullish on Verizon, American Express, and Wells Fargo. His recipe for EMC.
Kurt Feuerman has compiled an impressive record as an equity manager over the years at Morgan Stanley, Caxton Associates, and now AllianceBernstein. He started out on Wall Street in 1984 as an equity analyst covering food and tobacco at Drexel Burnham Lambert, and joined Morgan Stanley when Drexel collapsed in 1990. Within a few years, he persuaded Barton Biggs, then head of Morgan Stanley's asset-management arm, to let him run money. Feuerman delivered, as his fund, Morgan Stanley Aggressive Equity, topped a Barron's fund ranking in 1998.Kurt Feuerman: Why a Flexible Investor Likes Big U.S. Stocks
Following 13 years at Bruce Kovner's Caxton, a big hedge fund, Feuerman and his team joined AllianceBernstein in 2011. He runs the AllianceBernstein Select Equity Portfolios, which include separate accounts, a limited partnership, and two mutual funds, AllianceBernstein Select US Equity Portfolio (ticker: AUUAX) and AllianceBernstein US Select Long/Short Portfolio (ASLAX). Feuerman's long-only strategy has returned an average of 11.3% from its 2005 inception through August, versus a 7.6% annualized return for the Standard & Poor's 500. Feuerman's group now manages $14 billion, up from $1.4 billion when he joined AllianceBernstein.
A flexible investor, Feuerman, 58, now favors high-quality companies with a domestic orientation like Wells Fargo (WFC) and Verizon Communications (VZ), given his bullish view on the U.S. economy. And he thinks it's time for EMC (EMC) to get serious about stock buybacks.
Barron's: How would you describe your style?
Feuerman: We look for companies with great earnings power, solid growth potential, and shareholder-oriented managements. Although I tilt toward growth, my style is flexible. I'm always thinking about the downside, taking into account macro, sector, and valuation risk.
What's your view on the U.S. stock market?
It's still a decent time to be an owner of U.S. stocks despite the massive five-year bull market. The S&P is valued at around 17 times this year's earnings, but junk bonds are at 20 times, and investment-grade bonds are at 28 times [the inverse of junk and investment-grade yields].
What makes you bullish?
Credit conditions are very favorable. The U.S. economy is growing. The consumer is in great shape. Also, slower growth abroad is actually helping the U.S. via lower interest rates and lower commodity prices. Finally, corporate leverage is rising, but it's still very low versus history. So share buybacks, dividend growth, and mergers and acquisitions are enhancing shareholder value. I think the best opportunities are in megacaps generally. Although they've done better recently, megacaps still look cheap on a risk-adjusted basis.
How do you define megacaps?
Stocks trading with market caps of $75 billion and up. With the S&P at 17 times, many megacaps trade at 12 to 15 times, particularly in financials and legacy technology. One reason for this is the proliferation of hedge funds. These funds need to short something against their longs, and ETFs and megacaps don't have the event risk of a takeover. For example, there is perceived to be a low risk in being short Verizon. It is a relatively slow grower, and it's not going to be taken over. This is creating opportunity.
Where do you find the best opportunities?
We're skewed to U.S.-centric companies. Our outlook for the U.S. economy is quite favorable. Many observers complain that consumer spending has been disappointing. But this is the wrong thing to focus on. In 2006, consumer spending was robust. But that was a bad signal because it was built on a shaky foundation of too much debt. The underlying foundation of the U.S. consumer now is the best it has been in decades. Household free cash flow is at a new high, and debt service relative to disposable income is the lowest in 30 years. Credit-card delinquencies and housing affordability also are favorable. These are all pointing to years of strong growth ahead. The recent strength in the U.S. dollar is positive for U.S. stocks....MUCH MORE
SPX 1980.45 down 5.09; DJIA 16995.28 up 7.77; Nasdaq Composite 4516.30 down 51.30.
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