Cheapest Stocks Fail to Lure Investors as Bullish Signs Mount
Cheapest Stocks Fail to Lure Investors
John Zich/Bloomberg
Almost $57 billion has been withdrawn from U.S. stock mutual funds, the most during any four-month period since 2008, according to data compiled by the Investment Company Institute.
Almost $57 billion has been withdrawn from U.S. stock mutual funds, the most during any four-month period since 2008, according to data compiled by the Investment Company Institute. Photographer: John Zich/Bloomberg
Sept. 15 (Bloomberg) -- Russ Koesterich, head of investment strategy for scientific active equities at BlackRock Inc., talks about the past year for U.S. stocks and the outlook for the next 12 months. Koesterich talks with Bloomberg's Susan Li. (Source: Bloomberg)
U.S. stocks are almost unchanged in 2010 after falling four months and mutual fund investors have yanked money from equities since May, even as reasons for optimism accumulate.
Almost $57 billion has been withdrawn from U.S. stock mutual funds, the most during any four-month period since 2008, according to data compiled by the Investment Company Institute. Futures on the Chicago Board Options Exchange Volatility Index show concern has never been higher that shares will plunge, Bloomberg Businessweek reports in its Sept. 20 issue.
Indicators such as cash flow and dividend yields suggest equities are cheap, and Standard & Poor’s 500 Index companies are forecast to post the fastest profit growth since 1988. That’s being ignored by investors burned by the 2008 financial crisis, who got another reason to be wary on May 6, when $862 billion was erased from share prices in 20 minutes.
“Just look at three things: compelling valuation metrics, the sheer fundamentals in some areas like profitability, and this huge disconnect between how people are perceiving things and the reality of how they are,” said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which manages $342 billion. “As long as there’s still more focus on the trade that’s already passed -- the fear trade -- there’s a lot of upside opportunities.”
More than $590 billion has been stashed in bond funds since May, according to ICI, a Washington-based trade group. As of Aug. 31, 68 stocks in the S&P 500 paid dividends that exceeded the average corporate bond yield of 3.8 percent, more than any time in at least 15 years, data compiled by Bloomberg and Charlotte, North Carolina-based Bank of America Corp. show.
Cash Generation
Free cash flow produced by companies outside the financial industry represented 6.8 percent of their stock prices last month. That’s the highest since 1960 when measured against the average investment-grade corporate bond yield, according to Zurich-based Credit Suisse Group AG.
“The confidence in bonds is a bit misplaced,” said John Carey, Boston-based money manager at Pioneer Investments, which oversees about $230 billion. “People who have been burned by the stock market are putting money there, but now they’re underweight in equities.”
Professional investors are also nervous. Futures on the CBOE Volatility Index are pricing in a three-month volatility increase of more than 30 percent. The VIX, as the index is called, measures the cost of options that protect against losses in the S&P 500.
‘Paying a Lot’
“There are a lot of people who are interpreting it as bullish,” said Larry McMillan, president of the Morristown, New Jersey-based options research and money management firm McMillan Analysis Corp. “The real question is if it’s different this time or it’s a contrarian indicator. People are paying a lot for these premiums and you’ve got to figure someone’s going to get punished. Those guys who own September puts lost.”
The S&P 500 has risen 7.2 percent since Aug. 31, paring its loss since reaching a 19-month high on April 23 to 7.6 percent.
Some investors are taking the contrarian view: Commodity producers are fetching the richest valuations among 10 groups in the S&P 500, a sign of confidence in the global recovery.
The 32 mining companies, seed makers, and chemical suppliers in the S&P 500 trade for 18.7 times the past year’s earnings. That’s 3.9 points above the S&P 500’s average multiple of 14.8. When the industry’s valuation was that much higher than the S&P 500’s in 2004, the index was at the start of a five-year rally in which it doubled.
Economic Data
Signs of recovery continue to accumulate. The labor market has improved, with initial jobless claims falling in the week ended Sept. 4 by more than economists forecast. Companies added more jobs in August than projected. Retail sales climbed more than expected for a second straight month, while factory production increased. Pending home sales unexpectedly rose.
The outlook for corporate profits is robust, with analysts projecting gains of 36 percent in 2010, the highest since 1988, and 15 percent in 2011, according to estimates compiled by Bloomberg. S&P 500 companies that reported second-quarter earnings since July 12 beat forecasts by 11 percent.
Sustained job growth, consistent improvement in the housing market or stabilization in the European Union economies may lure money back to stocks, said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $63 billion.
“For a lot of retail investors, investing in equities has been like slogging through the rain the past 10 years,” he said. “They need a sign. They want something they can see, they can touch, they can feel. The question is what the catalyst is, what is it that’s going to generate that sustained growth?”
To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.
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