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Portfolio strategy update
Editor’s Note: The following portfolio update is from David Gottstein’s monthly Dynamic Research Group’s newsletter. It was compiled in early May. OUR CURRENT RECOMMENDATIONS
Albertson’s Inc. (ABS) $51.50
Bank of America (BAC) $71.5625
Chase Manhattan (CMB) $82.50 CURRENT MARKET NEWS Mommy, tell me a story..
Once upon America, in a time far, far away, equity investors made many types of investments.
Some equity investors liked large-cap stocks, some liked mid-cap stocks, and some thought small-cap stocks were just right.
Everyone in the kingdom researched their investments, very few investors paid exorbitant prices for their stocks and the expected portfolio return was approximately 12 percent a year.
Then an evil witch got bored and decided to stir things up in the kingdom. She cast a spell over the investors, causing them to have great fear of any type of foreign exposure and to prize earnings reliability above all other traits. The kingdom’s investors became like sheep, flocking to a small group of large-cap stocks in a manner that lacked rhyme and reason.
The herd drove the prices of these stocks higher and higher — up to never-before-seen levels. These stocks, from which the sheep seemed to expect 12 percent returns each month, were called the Nifty Fifty.
Unable to compete, the other stocks of the realm fell into a deep, troubled sleep.
As witches are wont to do, this witch (a bear in disguise) wished for this tale of a market to end badly — with the pricking of the investment bubble and figurative shearings for the sheep-like investors of the kingdom.
But, as in all good fairy tales, the witch doesn’t get the last word. A handsome prince (in the dual guise of Alan Greenspan and Robert Rubin) managed to help the kingdom survive the witch’s curse by keeping inflation at bay and the American economy healthy.
Slowly but surely, the other corporations of the land have awakened from the spell and started to deliver robust earnings. Earnings for these American-based companies are coming in strong from across the world. Asia seems to be turning positive. Inflation remains tame. Bond yields remain low. And the sheep-like investors have sought out broader grazing pastures, once again recognizing valuation as a meaningful investment tool.
The Nifty Fifty haven’t yet been burned at the stake, but for the first time in what seems like years, the bull market rally is being led by cyclical, energetic small- and mid-cap stocks. Investor confidence has returned. THE WORLD ACCORDING TO DRG Everything old is new again
There was a time when you couldn’t give away a low P/E stock. But now, as the stock market appears to broaden out, more of the lower valuation stocks we champion are enjoying a renewed sense of popularity.
Any day now we expect to hear Amazon.com announce a run on copies of Graham & Dodd’s classic book, “Security Analysis.” Too many of today’s so-called investors have no understanding of valuation.
Still, a sense of reason appears to be reigning over the market.
Of course, it’s not your father’s brand of reason — no self-respecting value investor should expect the multiple expansions that low P/E stocks have enjoyed over the past month to continue at such a torrid pace.
Then again, with the fairy tale witch and her curses banished for now, we do expect the non-Nifty Fifty stocks to continue their charge onward and upward.
The bright economic outlook and broadening rally trump the high levels of the major indices, so we’re holding steady at 85 percent invested. Good luck this month!
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