Time to Balance Your Portfolio
Wolfe thinks the major fundamental indicator, corporate earnings, will be a problem for much of the year. For longer-term investors, he recommends stocks for 50% to 65% of a portfolio, and he suggests dividing up that portion pretty much along the lines of the S&P 500 index -- 20% to 25% in technology, 15% to 20% in financial companies, and 10% to 15% in consumer staples and health care, for instance.
As for specific stocks, he cites Nortel Networks and ONI Systems in tech; Pfizer and Pharmacia in pharmaceuticals; Genentech and Vertex in biotech; American Express, Citigroup, and AIG in financials; and Duke Energy and Entergy among utilities.
Wolfe made this analysis in a chat presented on Jan. 11 by Business Week Online on America Online, in response to questions from the audience and from Jack Dierdorff and Amey Stone of BW Online. Edited excerpts follow. A complete transcript of this chat is available from BW Online on AOL, keyword: BW Talk.
Q: Chris, what do you make of the market so far this year? At least the Nasdaq is looking better.
A: Our sense of the Nasdaq now is that we're in the midst of a psychology shift brought about by the Fed's easing of interest rates. The psychology shift is likely to support modest to higher p-e multiples for technology stocks, even as the fundamental picture [the earnings picture] deteriorates a bit more. Looking longer term, we'd stay focused on individual securities and strong industries rather than the broad index.
Q: Which sectors do you believe will outperform in 2001? A:
Q: Which sectors do you believe will outperform in 2001?
A:In technology, we think we will continue to see strength in earnings and in improving fundamentals for the optical-networking companies, and we like Nortel Networks (NT ), a big-cap play, and ONI Systems (ONIS ), a mid-cap play. Nonetheless, we think the market is likely to remain volatile, so a balanced portfolio in 2001 will likely perform the best.
Areas investors will do well to remember to include pharmaceuticals and biotechnology -- pharmaceuticals for their high-quality, consistent earnings growth. We like Pfizer (PFE ) and Pharmacia (PHA ) for their strong product pipelines, and in biotechnology, we like Genentech (DNA ) and Vertex Pharmaceuticals (VRTX ).
On the back of the interest rate cuts, we think financial companies like Citigroup (C ), American Express (AXP ), and AIG will do well in 2001. And finally, utility companies -- the fears in the market about the situation around California, we think, are providing long-term investors with good entry points. We like Duke Power (DUK ) and Entergy (ETR ).
Q: Which style of investing will do better in 2001 -- value or momentum? A:
Q: Which style of investing will do better in 2001 -- value or momentum?
A:With the return of investors' focus on the business cycle, we think investors should also be focused on value.... For two reasons: The first is that the economic and fundamental backdrop is nowhere near as strong, and the outlook is nowhere near as strong as it was in 1999. The second reason is that we don't see a large buildup in the financial system of liquidity that could potentially move into stocks.... And so our message to investors has been to focus on the fundamentals. That said, there may be periods of time -- however short-lived -- where momentum may do well.
Q: Which brokerages look most attractive -- i.e., MER (Merrill Lynch), MWD (Morgan Stanley Dean Witter), LEH (Lehman Brothers), GS (Goldman Sachs), SCH (Charles Schwab)? And what about online brokers?
A: For high-risk-tolerance investors, some of the online brokers, like Ameritrade (AMTD ) and E*Trade Group (EGRP ), may have found short-term bottoms in their stock price. With the market likely to remain volatile, and much lower earnings projections for these companies, they may surprise to the upside. Of these other companies you mentioned, several have investment-banking exposure. We think 2001 will be a much more difficult environment to generate outsize investment-banking revenue.
Q: Here's a related question -- will the IPO market sink to an all-time low this year? A:
Q: Here's a related question -- will the IPO market sink to an all-time low this year?
A:I don't know about an ALL-time low, because I believe that with the depth of the IPO calendar in 2001 and an investor base that is now likely to be much more discerning, well-run companies with identifiable and sustainable competitive advantages will provably continue to enjoy a good market response to their offerings. As an example, I was recently in San Francisco for a health-care conference, and many of the portfolio managers I saw echoed those same thoughts with respect to biotechnology companies.
Q: News just broke that the FCC has approved the AOL/Time Warner merger -- what do you think of the deal? A:
Q: News just broke that the FCC has approved the AOL/Time Warner merger -- what do you think of the deal?
A:To use Chairman Kennard's expression, Old Media meets New Media. Very simply, our sense of the deal is that AOL's virtual-distribution network and Time Warner's physical-distribution network are strong complements to the product and content that both firms provide. While many analysts see this deal as a watershed, there is one cloud on the horizon -- and that's Yahoo!'s (YHOO ) guidance that ad revenues, and essentially the competitive environment for ad revenues, will be much tougher this year than last.
Q: Chris, you recommend a "balanced" portfolio strategy for now, but can you define balance in the current environment? I know it has to vary with an investor's age and goals and tolerance for risk.
A: For your overall portfolio...our views on these markets have led us to slightly underweight equities in favor of bonds. Now, that is a three- to six-month view. For longer-term investors [with time horizons greater than five years], a balanced portfolio could range from 50% to 65% in stocks.
However, within your equity portion, we see this year as being one that is very volatile and likely fraught with rapid sector rotation. So for long-term investors, we think it will pay to be patient and diversified (hence, "balanced") in this environment. That means we would have relatively similar weightings in different economic sectors to the S&P 500. That means something like 20% to 25% of your equity portfolio in technology companies, 15% to 20% in financial companies, and 10% to 15% in consumer staples and also health-care companies. These would be examples of the relative weights of the S&P 500.
Q: Chris, you mentioned the consumer-staples sector as an area investors should include. What are the stocks we should be looking at? A:
Q: Chris, you mentioned the consumer-staples sector as an area investors should include. What are the stocks we should be looking at?
A:High-quality companies like Anheuser-Busch (BUD ), Safeway (SWY ), and Colgate-Palmolive (CL ) are anywhere near 10% to 20% below where they were at the beginning of the year. Like health-care companies, we like the high-quality earnings of these companies and the earnings consistency, and find them attractive at current levels.
Q: Any opinion on RAD
(Rite Aid) -- almost doubled since New Year's? A:
Q: Any opinion on RAD (Rite Aid) -- almost doubled since New Year's?
A:Our firm doesn't follow Rite Aid, but the recent news on the stock has been very positive. Like other drug retailers, we've seen growth in this industry fueled by new stores and new drugs. Again, for the high-quality companies in this space, like CVS or Walgreen (WAG ), we like the earnings consistency and the growth prospects.
Edited by Jack Dierdorff
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