Thursday, July 19, 2012

Five Reasons to Like Stocks Now


I ran across this piece on the CNBC website.

Courtesy of famed investor Leon Cooperman, I thought it offered five good reasons to be investing in stocks now (I added the emphasis):

Leon Cooperman loves stocks - even if the economy isn't going anywhere - but doesn't hold the same affection for government bonds, though that's where investors have been putting most of their money.

The veteran investing guru and chairman at Omega Advisors believes growth will continue at a modest pace, but stocks will climb because they're underpriced...

"Stocks are cheap against inflation, they're cheap against their own history, they're cheap against interest rates, they're allowing for slower secular growth and they're allowing for lower interest rates," Cooperman said during a presentation at the "Delivering Alpha" conference presented by CNBC and Institutional Investor.

There is an old Wall Street saying that goes something like this:

The difference between an older portfolio manager and a younger one is the older one focuses on downside risk, while younger managers think more about upside possibilities.

However, in today's financial world, this axiom has been turned on its head.

Younger managers - who I would define as those who started in the business less than 15 years ago - are full of reasons why we are heading towards another leg down in stocks.

Older managers such as Leon Cooperman, however, look at today's stock market, and find more possibilities of profits than not.

Here's Cooperman again:

"It might require patience," Cooperman said. "It's very hard for a youthful 69-year-old person to preach patience."

So while Cooperman advises investors to load up on stocks, he thinks they should avoid one asset class: U.S. government debt, despite the strong flows to the group...

"U.S. government bonds are to be avoided," he said. "They are a very unattractive asset class."

The reason for this dichotomy is not hard to fathom:  If you've only experienced choppy or downward stock markets - such as we've had since 1998 - you are naturally only focused on risk rather than reward.

And while there is always the possibility of a correction, the fundamentals would suggest that investors with any sort of longer time frame will find numerous opportunities in the stock market.

Here's noted equity strategist Richard Bernstein thoughts on U.S. stocks in this morning's Financial Times:

Once again, investors focusing on politics may be missing an opportunity.  The Russell 2000 has the fastest projected earnings growth rate of the major equity segments in the world, and the Russell 2000 has outperformed emerging markets since the March 2009 trough.  The U.S. stock market may actually be a "growth" market.

We see many growth-oriented themes in the U.S. The U.S. consumer is directly benefiting from the rest of the world's economic woes.  Real wage growth is positive for the first time in nearly two years thanks to falling petrol and energy prices.  Given a 1.5 per cent Treasury note, it should be no surprise that housing and construction are no longer comatose.

Today's extreme levels of pessimism regarding stocks, and incredibly low level of bond yields throughout the world, is creating an opportunity.