Birinyi Sees Stock Bull Run Intact as Apple Overshadows Greece
U.S. companies are earning too much for the bull market to be derailed by speculation Europe’s debt crisis will spread, according to Laszlo Birinyi, who advised clients to buy shares before they bottomed in March 2009.
Apple Inc. (AAPL) and Google Inc. (GOOG) showed they can weather market declines, said Birinyi, the president of Birinyi Associates Inc. in Westport, Connecticut. The stocks beat the Standard & Poor’s 500 Index during its 18 percent decline from April 29 to Aug. 8, with Apple gaining 0.9 percent and Google up 0.4 percent. The top two equity holdings at Birinyi’s firm are cheap, he said. Google and Apple each trade at about a 60 percent discount to their averages before the drop.
The former Salomon Brothers Inc. equity trader remains bullish even after concern the global economy is heading for a recession sent the benchmark gauge for U.S. equities down 15 percent from its April high through the end of last week. The three-month correction through the index’s 2011 low on Aug. 8 occurred as investors speculated the debt crisis that began in Greece was spreading. While Birinyi said equities won’t return much in the next 12 months, they will surge after that.
“Apple comes out with the new phone, and on day one, the line will go around the block three times,” he said during a telephone interview on Sept. 8. “It’s really not going to matter what’s going on in Greece,” he said. “I’m not willing to give up on the world quite yet.”
Equities tumbled around the world today, pushing the MSCI All-Country World Index within 0.5 percent of a bear market, defined as a 20 percent retreat from its high. The S&P 500 lost 0.5 percent at 10:30 a.m. in New York amid speculation Germany is preparing for a debt default by Greece.
The S&P 500 sank as much as 13 percent last month, driving its valuation down to 12.2 times earnings, compared with the average since 1954 of 16.4, according to data compiled by Bloomberg. It was the cheapest multiple since March 2009. The measure then recovered, trimming the August drop to 5.7 percent. Stocks plunged last month as S&P stripped the country of its AAA rating and speculation increased that the world’s largest economy could enter a recession.
The U.S. has a “better-than-even chance” that it will enter another recession, Harvard University’s Martin Feldstein, a member of the National Bureau of Economic Research committee that determines economic cycles, said on Aug. 26. Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC, put the odds at 60 percent last week, while JPMorgan Chase & Co. (JPM) sees the chance of the second recession since 2007 at an “uncomfortable” 40 percent, according to a Sept. 7 note.
S&P 500 earnings are poised to reach a record $99.88 a share this year, according to the average of securities industry estimates compiled by Bloomberg, after companies beat projections for 10 straight quarters. Analysts have grown more optimistic about earnings since the S&P 500 peaked on April 29, driving their forecast up from $98.73 a share. At Apple, profits have exceeded estimates every quarter since at least 2005, while Google has posted earnings growth of more than 15 percent every quarter since the bull market began.
The S&P 500 is in the third of four phases seen in bull markets, a period of lower returns and slower advances, according to Birinyi. While the index posted losses of almost 20 percent in the middle of 2011 and 2010, it won’t do that again through this time next year, he said.
Birinyi has remained bullish for the 30 months since March 2009, saying stocks are in a “multi-year” rally. The S&P 500 gained 39 percent in the first three months of the bull market before more than doubling through April 2011. The decline since then pared the total gain to 71 percent through last week. Bull markets since 1962 have produced advances averaging 120 percent, according to Birinyi Associates data.
Comparisons to previous rallies signal more appreciation, Birinyi said, reiterating a point he made at least nine times during interviews and reports since the S&P 500 peaked in April. As the S&P 500 was sliding last month, Birinyi said the market’s upward trend remained intact because companies are still reporting higher earnings.
This bull cycle is most similar to the one that began in 1982 and generated a 229 percent advance in five years, he said. In the last eight months of that rally, the S&P 500 rose 39 percent, data compiled by Bloomberg show.
‘Starts Off Gangbusters’
“When you have a market that starts off gangbusters, it does not tend to peter out in the short term,” Birinyi said. “We’ve been working on that thesis and we see no reason to change.”
Birinyi said he isn’t buying financial institutions and health-care companies, or seeking corporations that pay out dividends. He has been recommending five stocks this year: BP Prudhoe Bay Royalty Trust (BPT), Cummins Inc. (CMI), Hermes International (RMS), Priceline.com Inc. (PCLN) and Ralph Lauren Corp. All have outperformed the S&P 500 since the index reached 1,363.61 on April 29, the 2011 high, except Cummins, which is down 11 percentage points more than the index through Sept. 9.
“With regard to all the emotion, we try to stay away from the possibilities and the potentials,” Birinyi said. “Yes, the market could go down. Yes, we could go into a double dip. But we try to work off facts. And facts are that Apple’s trading at 12 times earnings, and even in a worse-case scenario, teenagers are still going to buy iTunes.”
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