Money managers opt for stocks
By Warren Boroson
Gannett News Service
Stocks are a much better buy now than bonds, especially the stocks of solid companies that have been raising their dividends — like pharmaceuticals. Among bonds, one of the few decent bets is municipals.
That was the consensus of four money managers at a news briefing that Citigroup Asset Management held recently in New York City.
Hersh Cohen, a veteran investor who runs the Smith Barney Appreciation Fund, said that right now, companies such as Merck, Johnson & Johnson and Pfizer are "great companies selling at low prices." He said they pay good dividends, which they have been increasing.
John G. Goode, a veteran who runs the Smith Barney Fundamental Value Fund, said Pfizer is his biggest healthcare holding, along with other "household names," like Abbott, Wyeth, Merck and Johnson & Johnson. Although Boston Scientific is said to be hurting J&J with its stents, Goode went on, "investors are ignoring its good, long-term franchise."
As for the mutual fund scandals, Cohen doesn't think that they will hurt the overall market the way the Tyco, Enron and WorldCom scandals did. People won't see the same connection between the fund scandals and the recent bear market, he said, as they did with corporate malfeasance.
The stock market itself, Cohen said, is "on a better footing" than last year, and "we have expunged the speculative excesses." Still, "we don't have the gross undervaluations that we had in March."
Investors don't seem to be aware yet that dividend-paying stocks are now especially desirable, he added — such stocks have climbed only one-third as much as other stocks in the recent rally.
"Investors are still nervous," he said. "It's professional investors who have been driving the market up" — hedge funds and day-traders among them.
Investors seeking good dividend-paying stocks should have a long-term outlook, Cohen said, from five to 20 years. And he mentioned companies that recently raised their dividends — Waste Management by 7,500 percent, Wells Fargo by 50 percent.
Other desirable dividend-paying stocks mentioned by Goode were Dow Chemical, Alcoa and Chevron. Industries he favored included energy, utilities and basic materials. He also likes healthcare, and although those stocks have been underperforming for a year or two, Goode said he expects their prices to bounce back.
An argument that Goode gave for stocks paying relatively high dividends — over 2.5 percent — is that stock returns should be lower in the years ahead, and dividends will therefore compose a higher percentage of total return. Since 1925, he noted, dividends have contributed about 40 percent of the stock market's total return.
Bonds will be in a bear market, he added, and with stocks returning 7 percent or 8 percent going forward, stocks will be the best place to be. But many investors, he conceded, are still "living in a bunker."
A winner of Morningstar's fixed-income manager of the year, Joseph Deane, who runs Smith Barney Managed Municipals Fund, is worried about bonds in general. Interest rates will go higher, unless the economy does a nosedive, so caution and conservatism are what's called for.
"Rates must rise or the economy must go back into the tank," Deane said. And: "I wouldn't bet against the U.S. economy." (When rates rise, existing bonds — with their relatively low rates — usually lose value.)
"Economically," Deane said, "we may not have seen anything yet." There's a 50-50-chance that Europe and Japan will have decent recoveries, he said, and "we should remember that, for the last 15 years, it's been only a U.S.-driven economy."
Deane favors stocks over bonds now. Stocks should return 8 percent, he predicted, and bonds should be flat.
Deane's own fixed-income portfolio is defensive. No zero-coupon bonds. Relatively high yields — 5 percent or more. Maturities of only three or four years for new money in private accounts. (His fund will invest in longer-term maturities "at the right price.") A good deal of cash on the sidelines.
Still, he was somewhat optimistic about municipals. They are relatively cheap now, he said, yielding 98 percent or 99 percent of Treasuries. And there will be an oversupply of Treasuries when the federal government must pay its debts, and fewer municipals issued in the future.
In short: When interest rates rise, "municipals will go down more slowly."
A final speaker, Steven Bleiberg, who heads Citigroup's Global Investment Strategy team, said he is overweighted in emerging markets and underweighted in Japan.
Stocks in emerging markets and Asia (apart from Japan) are cheap, he said, As for Japan, he said that its economy has been flat. And while some Japanese stocks may be worth buying, "it's hard to get excited."
