A Grateful Dead Year

ken fisher , 12.31.09.

2009 was a textbook case of how stock markets are supposed to react to big bear markets and recessions.

As the Grateful Dead used to sing, "what a long, strange trip it's been." When I started in this industry, 38 years ago, classy firms like Disney and DuPont sold at 40 times earnings. These were "one decision" stocks--supposedly so reliable that you could make a decision to buy them and just put them away in a safe deposit box forever. This era of glamour stock investing was followed by a decade of negative returns. And then, just as most Americans had given up on stocks, there began an almost unparalleled 18-year run for stocks.

By 2000 it was another "new era," and "clicks" not "bricks" were everything. Profits were supposedly irrelevant. Since then stock returns have been negative.

And now? This should be a great time to own stocks. But we forget these long-term lessons and think about the recent past. And so now the investing public sees a future of dismal returns, just as it did in the mid-1970s and early 1980s.

My 2008 bullishness was wrong. Pretty much everything I'd ever learned about how markets should work didn't. I wasn't alone. That year's chaos contributed to the early 2009 view of a new global Great Depression and a new set of rules tied to the "lost decade."

That dismal outlook arrived just in time for a 2009 that was a textbook case of how markets are supposed to react to big bear markets and recessions. My Feb. 16 column, "Anticipate the V," worked almost flawlessly. I'm betting 2010 will work out the way markets usually do in the second year after a big bear market, with returns not as high as 2009's but well above average. My 2010 New Year's Eve is a lampshade-on-head gleeful appreciation of 2009 plus an anxious anticipation of a year where stocks like these should reward nicely:

Enersis ( ENI - news - people ) (ENI, 21) is an electricity generator and distributor based in Chile but reaching into Argentina, Brazil, Colombia and Peru. Cheaper than developed country utilities by any metric but with a past and future growth rate near 20%, it enjoys an operating margin (Ebitda to revenues) of 32%, triple the industry norm. It sells at less than nine times my estimate of 2010 earnings. You can anticipate 2010 dividends of better than 5% of today's stock price.

Another Chilean firm, LAN Airlines ( LFL - news - people ) (LFL, 16), connects countries like Argentina, Ecuador and Peru with Chile, America, Europe and the South Pacific. It's an emerging markets growth stock at a value price. Eighty-four-passenger planes also carrying cargo (boosting efficiency relative to competition) plus 11 dedicated cargo planes are currently seeing high single- and low double-digit increases in capacity and traffic. It sells at one times revenue and ten times my estimate of 2010 earnings.

A highly speculative airline I find compelling is China Eastern Airlines (CEA, 36), an airline based in Shanghai that is China's third largest, with about a fifth of the country's traffic. CEA has lost money for years. The recession made matters worse. I see a smoother ride ahead as a rising air current lifts all these planes. Revenue should grow 25%, almost eliminating losses in 2010. With that the stock should excel. It sells at 30% of trailing sales.

The Taiwanese firm United Microelectronics (UMC, 3.4) is the world's second-largest contract semiconductor maker. Skeptics prefer the glamour and larger market share of Taiwan Semiconductor. In the current strong semiconductor upturn, as all firms rebound briskly, the difference between the two will be less than expected, meaning that the stock should do well. Revenues are rocketing right now. United is selling for 24 times consensus 2010 earnings, but I'd bet those earnings come in closer to 25 cents a share than to the 14 cents expected.

Have employee staffing firms had a tough time? Well, yes. Manpower ( MAN - news - people )'s (MAN, 56) half-billion-dollar profit in 2007 melted to $50 million (on revenue of $16 billion) in 2009. It should make more than $150 million in 2010 as the global economy gains steam and revenue rises above $20 billion. In the early stages of the recovery, employers will use temporary workers rather than commit to full-timers who are expensive to lay off. Spanning 80 countries (albeit with an overweight to France), Manpower is well positioned to take advantage of this phenomenon through its 400,000-plus customers. The recession increased its labor quantity and quality naturally. It sells at 30% of revenue and 17 times the $3.25 per share I think it can earn in 2010.

Edited by atulbull - 02/Jan/2010 at 6:26pm

Recovery, Part Two

Ken Fisher, 01.21.10

Don't succumb to the pessimism of disbelief. The second year after a bear market is a fine time to own stocks.

It's report-card time--a FORBES-mandated retrospective on my 11 columns published in 2009. This year the assignment is easy. My picks did well. During 2009 I made 65 recommendations (including six repeats). If you had put an equal sum into each you would be up 44.4%. If you had put the same money on the same dates into the S&P 500 you would have gained only 20.9%. The FORBES statistics department, moreover, docked my picks a 1% trading cost but didn't dock the index. Neither return figure includes dividends, which are about one percentage point higher on my stocks.

In the 14 years that we have been going through this exercise, I have lagged the S&P 500 only three times. My average gain over those 14 years has been 9.9% (and that's in effect a partly invested return, since each calendar year's buying is spread over 12 months); the corresponding market average has been 4.7%.

My best 2009 pick was Braskem (BAK, 17), Brazil's petrochemical giant, up 216% from its first recommendation in the Apr. 27 column (released Apr. 8) to a year-end price of $16.40. Hang on to it. My worst was Chinese solar cell maker Suntech (STP, 17) on July 13. It lost 9%. I still like it. You should keep these two, and I will carry them over as 2010 buys. My third carryover: Canada's Magna International ( MGA - news - people ) (MGA, 50), the world's third-largest and most product-diversified auto parts maker, up 57%. You shouldn't necessarily unload the other 56 stocks (that depends on your tax situation), but I am not choosing to reenter them in the 2010 derby.

We've entered a period that I call the "pessimism of disbelief." The public's mood is to notice anything bad (like 10% unemployment) while dismissing anything good (like narrowing credit spreads) as not credible. Most investors, having failed to anticipate the recent bull market, now fear the risk of a big fall. It is presumed that monetary and fiscal stimulus will not work or will give rise to inflation, impossible debt burdens and socialism. Health care legislation is an Obamanation, and so on. This is the "wall of worry" bull markets love to climb. I think pessimism will decrease in 2010, helping stocks.

Despite all you may fear, today's negatives are lesser ones than we've often faced. The history of second years after a big bear market that is followed by a positive year like 2009 is stunningly, consistently, overwhelmingly positive. Don't succumb to the pessimism of disbelief. Buy stocks like these:

Vivo (VIV, 30) is Brazil's largest cellular operator, with a third of the market--50 million subscribers, all using Vivo-branded wireless sets. This plays directly into the growth of Brazil's emerging middle class. Vivo should keep growing materially faster than the industry, yet sells at 80% of 2010 revenue and 20 times the $600 million I think it will earn.

Ireland's CRH (CRH, 26) is a diversified building-materials firm that amazingly remained profitable throughout 2008 and 2009, albeit with clipped earnings. This $26 billion (sales) firm operates in 35 nations, making concrete, cement, asphalt, flat glass, roofing supplies and more. Its sales base is diversified among residential, nonresidential and infrastructure markets. With a history of above-average growth and superior profit margins, CRH is well positioned as recovery extends overseas. Its price is low in relation to industry averages: You are buying at 55% of annual sales, five times cash flow and 12 times trailing earnings. The recent earnings are depressed. You are paying maybe nine times 2010 earnings.

Korea's LG Display (LPL, 17) is the world's second-largest manufacturer of liquid crystal displays, after Samsung. These lcds are used in televisions, computers and cell phones assembled and sold by other firms. LG Display (once wholly owned by LG Corp., the former Lucky Goldstar) was initially listed in 2004. It's still 35% owned by LG, a conglomerate best known here as a maker of cell phones. LG Display sells for 80% of its $14 billion of revenue, 1.4 times book value, five times cash flow and ten times my estimate of 2010 earnings.

Lubrizol ( LZ - news - people ) (LZ, 77) of Wickliffe, Ohio makes a wide array of speciality chemicals used in engine oils, transmission fluids, compressor lubricants, coatings and inks. Most of its sales go to oil refineries and basic industry. I expect several years of 20% sales growth, which should make the stock, seemingly expensive at 55 times trailing earnings, reasonably priced at 12 times the earnings plausibly achievable in 2011.

Bull Market, Chapter Two

Ken Fisher, 03.25.10

I like what I see: improving fundamentals plus skepticism: the classic ingredients of the second phase of bull markets.

It's a year since the bull market began, and I remain firmly bullish. I'm often wrongly called a permabull. I'm not one. In 25 years of FORBES columns I turned bearish for three extended periods: in 1987, in 1990 and between 2000 and 2002. Yes, I completely missed foreseeing the 2008 bear market. But that doesn't make me a permabull.

When in doubt I am biased toward owning stocks. Stocks rise more often than not. Since bear markets are always followed by bull markets--which is a basic rule some investors seem unable to accept--it seemed to me basic to be bullish once the 2008 bear market was well under way. One year into the current bull market I like what I see: globally improving fundamentals plus strong societal skepticism. Snarky, cranky sentiment and better fundamentals are the classic ingredients of the second phase of bull markets.

Economic numbers globally and almost consistently keep coming in up and better than expected, while being largely dismissed in terms of significance. In part this is because the fastest recoveries from the recession are happening in the 25% of global GDP found in emerging markets countries. Maybe it's unnerving that China and Brazil are leading us. Americans are way too U.S.-focused.

My Feb. 8 column cited the "pessimism of disbelief," the tendency to see all news as bad, or, if good, as something likely to morph into something bad. (Typical formulation: Stimulus efforts either won't work or will cause inflation.) You can see this pessimism in mutual fund flows: For three years there has been a migration into bond funds--mostly into government bonds for safety--just in time for long-term U.S. government bond funds to return a --17.5% in 2009. That's fear.

For more on market sentiment, visit market blogs anywhere. The skepticism is wise-guy thick. Anyone posts something positive and they get pounded by the wiseacres. I love it. This is the wall of worry bull markets classically climb. So be bullish while the sentiment's sour--and keep buying good companies at reasonable prices, like these:

Brazil's Fibria Celulose (FBR, 22), the old Votorantim Cellulose, at first glance seems neither cheap nor positioned to dominate. But it's about to merge with Brazil's Aracruz to become the global leader in hardwood pulp, with 24% of the market. This is the raw ingredient for high-end paper and ultrasoft tissue. The merger implies future pricing power in a market where prices are already firming as inventories shrink. Fibria sells at 20 times projected 2010 earnings and at 90% of book value. Not very cheap. But I'll bet that price will turn out to be 8 times 2011 earnings.

Coal is China's energy source. I recommended Yanzhou Coal Mining (YZC, 22) in the July 13 column at 12. It still has upside. With great reserves in advantageous locations, this low-cost 35-million-ton-per-year (and growing) producer should enjoy fatter profits margins over the next several years. It sells at 14 times likely 2010 earnings.

Today Big Brother should be watching. Israel's Nice-Systems (NICE, 31) makes voice loggers that record, archive and monitor communications from multiple sources. These complex systems can detect changes in emotion among voices and are sold to 24,000 customers ranging from multinationals to Australia's Parliament to police and fire departments. For a steady grower this company is too cheap at 17 times 2010 earnings and 1.8 times book value.

New Zealand will prosper in part on its proximity to emerging markets. This prosperity will rub off on the dominant phone company, Telecom New Zealand (NZT, 7), which is too cheap at ten times 2010 earnings and 80% of annual revenue. You're likely to get an 8% dividend yield over the next year on today's price.

Weight Watchers (WTW, 25) runs weight-loss cheerleading sessions and licenses its name to vendors of moderate-calorie prepared foods. Is it hard to envision why the stock should rise and folks should shrink their wallets to diet now? Just see it as a classic long-term, moderate-growth consumer stock--just when stocks of expensive brand-name products are doing well. It is, after all, the brand in its field. As consumer income bounces back, people don't have to choose between this and indulgences: They might choose both. Weight loss makes them feel better about indulging. This stock was for a very long time steadily over $35 and often up to $45. It will get back there. At today's price it goes for nine times likely 2010 earnings and yields 2.8%.

Mountains and Molehills

Ken Fisher, 05.20.10

Utilities in emerging markets often combine low risk and growth. Take a look at Brazil's Companhia de Saneamento Basico.

It's simply astounding, after all we've seen in recent decades, that anyone pays attention to credit ratings put out by the officially sanctioned rating agencies. As September's annual report (mandated by a 2006 credit rating "reform" law) from the Securities & Exchange Commission documents at great length, there is no competition or improvement in this oligopoly. The big agencies have a way of warning of trouble spots (like Enron) only after the trouble is evident or of adding to a panic (like Greece's) that is already beyond any rational basis.

In other words, Moody's and Standard & Poor's compound investors' worst sins, including the tendency to make a mountain out of a molehill. The fact that investors exaggerate the importance of economic negatives is a theme that recurs throughout my 25 years of column writing for forbes. And if you want more on that subject let me put in a plug for the recently published The Making of a Market Guru, by Aaron Anderson, a survey of my FORBES columns.

Until the bailout on May 9 the pessimists had us persuaded that Greece was on the verge of liquidation and Spain was close behind. They forgot that between 1989 and 1994 Greece, which accounted for the same share of the world's economic output that it does today, had not a drachma of long-term debt. It had to finance itself solely on short-term debt--and its interest payments, as a fraction of GDP, were more than twice what they are now.

Panics pass. This one will, too. Stop thinking about short-term market jitters and more about long-term investing. Own stocks like these:

Companhia de Saneamento Basico (SBS, 39) is a Brazilian water- and sewage-treatment firm. Utilities in emerging markets often combine low risk and growth, and this is an example. With 25 million customers, this is the world's third-largest utility dealing with water and should maintain growth of about 10% a year. It's cheap at one times revenue, 70% of book value and six times likely 2010 earnings.

Canada's Corus Entertainment (CJR, 20) was spun off in 1999 from Shaw Communications (SJR, which I recommended Nov. 2) and is still controlled by Shaw founder J.R. Shaw. Corus is one of Canada's largest media companies, spanning radio, TV stations, TV content production and book publishing. It has recently lost money, scaring investors, but should turn a profit this year and deliver earnings close to $2.50 a share in 2011. The stock will move ahead of the earnings.

I'll bet Canada's Methanex ( MEOH - news - people ) (MEOH, 23) gets taken over before this business cycle ends. As the world's largest, dominant and low-cost producer of methyl alcohol, this $2.1 billion (market capitalization) specialist would fit neatly into many larger chemical firms. It also runs the world's largest fleet of methanol tankers. It follows my theme that this is a good time for basic materials stocks. It sells at eight times 2010 earnings with a 2.7% dividend yield.

MGM Mirage (MGM, 15) is more a roll of the dice than most stocks I recommend, but I like its consumer discretionary exposure. Why now? Gambling hasn't recovered to its prerecession level. But stocks in this sector will price this year on expectations for consumer behavior in 2011 and 2012. MGM is the largest Las Vegas gaming operator, with three of the best properties: the Bellagio, the MGM Grand and Mandalay Bay. It's in lesser gambling regions in the U.S. and in Macau. It's currently losing money and has $13 billion of long-term debt, scaring investors off. But it's cheap at only one times revenue and will look cheap in relation to earnings when earnings return.

Don't let the BP disaster scare you away from oilfield services. I like two companies: Halliburton ( HAL - news - people ) (HAL, 29) and Baker Hughes (BHI, 47), respectively the sector's second- and third-largest firms. Between them they cover the entire spectrum globally and complement each other nicely. Directional drilling, bits, submersible pumps, pressure pumping, oilfield chemicals (which is about to be huge, as shale wells get frakked)--they do it all. There is no valid alternative in the near future to fossil fuels. Considering their future and strengths, these two providers are reasonably priced at 14 times this year's expected earnings.