Analysts’ Optimism Persists
Stock brokerage analysts have drawn criticism lately for their overall bullish tone, but they’re hardly alone: On Wall Street, it seems, the sunny outlook comes from the top.
Despite tempering their forecasts of late, widely followed brokerage strategists such as Goldman Sachs’ Abby Joseph Cohen still, on average, expect blue-chip stocks to score double-digit gains from now through the end of the year.
The oft-quoted Cohen cut her forecast last week for the Standard & Poor’s 500 index to 1,500 from 1,550, citing the economic slowdown. Even so, the index would have to climb 26.6% by Dec. 31 to reach her revised estimate, based on Friday’s closing price of 1,184.93.
On Thursday, Salomon Smith Barney’s strategy committee cut its S&P; 500 earnings estimates for this year and next--but left intact its S&P; index price target of 1,400 for the end of 2001, or a gain of 18.2% from current levels.
This bullish stance got a boost Friday when the S&P; 500 closed up 2% for the day and the week. But the benchmark index is still down 10.3% year to date.
Among money managers who are running actual portfolios, expectations tend to be more conservative. Even some mutual fund managers who already have notched hefty gains so far this year say more muted returns are likely in the near term.
“If you could guarantee me a 10% gain between now and the end of the year I’d sure take it,” said Bill Nygren, manager of the Oakmark Select and Oakmark funds, which are up 25.9% and 20.7%, respectively, in 2001.
Among the nine major brokerage strategists who have issued year-end S&P; 500 forecasts, the average estimate is for the index to reach 1,362.22 by year’s end, according to Bloomberg News. That would be a 15% gain in about four months.
Cohen’s estimate of 1,500 tops the list of forecasts for the S&P; 500. The grimmest view comes from J.P. Morgan Chase & Co.’s Douglas Cliggott, whose year-end target of 1,100 would mean a 7.2% drop from current levels.
These high-profile strategists help shape their brokerages’ overall stance by looking at the market and the economy from the “top down,” or the macro perspective. The armies of Wall Street analysts who cover specific industries and companies, by contrast, generally examine stocks from the “bottom up,” issuing buy, sell or hold recommendations.
In shifting her S&P; 500 price target Tuesday, Cohen also slashed her earnings projections for the S&P; 500 companies overall, to $51 per index share from $56.50 in 2001 and to $56 from $61.50 in 2002.
If her price and earnings targets are on the money, that means the index at year-end would sport a trailing price-to-earnings ratio of 29 and a forward P/E ratio of 27--both high by historical standards. P/E, or a stock’s share price divided by trailing or expected per-share earnings, is a primary means of valuing stocks. Value-oriented investors tend to favor stocks with low P/Es.
Though most mutual fund managers avoid making broad market forecasts, many say they aren’t banking on big gains in the last four months of the year. For one thing, they say, stocks in general are “fully valued.”
“I have no idea what the market is going to do in the next three or four months, but a gain of around 20% doesn’t seem like a compelling bet given these valuations,” said John C. Thompson, manager of Thompson Plumb Growth, up 12.6% this year. “In terms of earnings multiples, every other bull market has peaked where we’re supposedly troughing.”
Some managers say investors should temper their longer-term expectations.
“The speculative environment of 1999 and early 2000 was even worse than 1929, and we still have a ways to go to correct that,” said Bob Rodriguez, manager of FPA Capital, up 24.7% this year. “I believe the U.S. economy is going to stay in a languid, slow-growth position for the next five years, and the equity market is likely to produce substandard returns.”
That could mean the S&P; will provide a 5% return on an annualized basis over the next few years, Rodriguez said, regressing toward its historical annual average return of about 10%, while smaller and mid-size stocks, whose valuations are cheaper, may rise in the high single digits.
Still, some fund managers are unapologetically bullish.
“Stocks may not be a screaming bargain, but overall they are about as cheap as they’ve been in three years,” said Larry Puglia, manager of T. Rowe Price Blue Chip Growth, which is down 15.1% this year. “I’d never promise anything, but I could see the market returning 15% to 20% by the end of 2002 as a kind of bounce-back, and maybe significantly more after that.”
Even those managers who don’t expect much from the market as a whole for a while say they are finding selected bargains.
“The market looks fairly priced--neither cheap nor expensive--but we’re finding value among the non-tech leaders,” Nygren said, pointing to such companies as Kraft Foods (ticker symbol: KFT), H&R; Block (HRB), Washington Mutual (WM), supermarket chain Kroger (KR) and medical device maker Guidant (GDT).
Rodriguez said he has been buying beaten-down energy stocks in recent months.
Thompson said he likes multinationals such as Coca-Cola (KO) and Gillette (G), which can benefit from the softer U.S. dollar that typically follows interest rate cuts by the Federal Reserve. He also likes insurance companies such as Cincinnati Financial (CINF), which can benefit from an improved pricing environment (for companies, not consumers).
Puglia said he is finding companies with solid profit growth prospects and reasonable valuations in varied sectors, including Citigroup (C) and First Data (FDC) in the financial area, Viacom (VIA/B) in media, American Home Products (AHP) in pharmaceuticals and Chevron (CHV) in energy.
“This looks like an excellent time to be in the market,” he said. “We wouldn’t be fully invested if we didn’t think so.”
In defending Salomon’s decision to leave its year-end price target intact despite trimming earnings projections, senior equity strategist Tobias Levkovich pointed out that the firm is not looking for anything unprecedented.
“If a 20% gain in four months sounds like a lot, remember that we had a rally of the same magnitude in just six weeks during April and May,” he said. “I’d say we’re optimistic but not outlandish.”
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Setting Their Targets
Wall Street brokerage strategists have an average year-end target of 1,362.22 for the Standard & Poor’s 500 index, or a 15% gain from Friday’s close of 1,184.93, according to a survey by Bloomberg News.
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-S&P; 500 year-end target- Firm Strategist Level % change* Goldman Sachs Abby Joseph Cohen 1,500 +26.6% A.G. Edwards Mark Keller 1,450 +22.4 Lehman Bros. Jeffrey Applegate 1,450 +22.4 Morgan Stanley Peter Canelo 1,400 +18.2 CIBC Subodh Kumar 1,400 +18.2 Salomon SB Committee 1,400 +18.2 First Union Rod Smyth 1,350 +13.9 Deutsche Banc Ed Yardeni 1,210 +2.1 J.P. Morgan Douglas Cliggott 1,100 -7.2 Avg. of nine year-end forecasts 1,362.22 +15.0
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* From last Friday’s close
