Interview: Investment Strategist with Westwood Holdings
>> the third executive this week moves from credit suisse first boston to morgan stanley. morgan chief john mack has been tapping former colleagues to join him at the firm. 55 of morgan’s managers, bankers and traders left during the battle to oust philip purcell. as we’ve been reporting, earnings season is in full swing and results have topped analysts’ expectations. that is one of the reasons why the s&p 500 has posted its longest string of weekly gains in 10 months. the question is, can the market keep it going? let’s ask david spika, investment strategist with westwood holdings, where he helps manage $4 billion in assets, joining us from dallas, texas. mr. spika, thank you for joining us.
>> thanks for having me, derek.
>> we were talking about energy stocks. how do you feel about energy nowadays?
>> we are still bullish on energy, despite the fact that a lot of people are scared of energy, we’re still very bullish. not all energy companies are created equal but if you look at the sector on the whole, the stocks are valued as if crude oil was about $40 a barrel. we know it’s close to $60 today. the companies continue to beat earnings estimates because the market refuses to give them credit for the true price of oil. as long as that continues, these companies will continue to produce cash flow and earnings vastly exceeding what the market expects and stocks prices will continue to go higher.
>> is this in the near term?
>> we believe so in the near term. we’re at $57 crude today. our analysis shows us that the market is pricing in $40 crude. we’ve done an analysis of what would happen to these stocks’ earnings if crude fell below $40 a barrel and even below $40, we can make an investment case but at $55 to $60 a barrel, they’re extremely undervalued, producing a lot of cash flow, disciplined with their investments and we’re very bullish.
>> what about the s&p 500? does it have the momentum to stay at this pace?
>> think about where we are in the s&p 500. if you told me a year ago that we would see the fed raise interest rates by 2.25%, we’d see energy go above $60 a barrel and that we’d still have earnings―or economic growth of 3.5%, i would have said you’re crazy but economic growth at 3.5% can continue to drive earnings higher and propel the market and the market ‘s still relatively inexpensive, only trading at 16 times. i don’t think we’re pricing in unrealistic expectations today.
>> what do you see as the catalyst that’s driving the market ?
>> i think today the catalyst is as you pointed out, people are optimistic about the earnings season, they’re used to earnings exceeding expectations. we’ve seen this in the past six, seven, eight quarters. investors expect it again, it’s coming to fruition and i think investors are optimistic that the fed will end the rate hike cycle soon. i think most people are looking at 3.75% as being the top of the rate hike cycle. once that ends, the market generally performs much better, particularly if economic growth continues at a reasonable pace.
>> can we can expect to see oil drive things down, or no?
>> above $60 is a wild card. above $60, we attempted for a short period of time and came back down. i think the market is comfortable between $50 and $60, that we can continue to grow the economy at 3.5%. above that, that’s a wild card. if something drove oil above $60 a barrel, we’d have to re-evaluate.
>> what about energy versus technology? how do you see those two sectors?
>> that’s a great question. a lot of people today are saying the energy game is over, let’s bail into technology that’s underperformed. the technology sector has performed very well over the past few weeks. we’d still like energy better because of valuation. valuations are much more attractive and we think that the supply-demand factor in the energy market makes it much more attractive than the tech benology sector where you still just don’t have corporate technology spending at a level that can really drive earnings where they need to be. i’m sure some of the consumer stocks are performing well but overall, corporations are not spending to the extent they need to drive technology earnings where they need to be to justify current valuations. >> what did you buy today?
>> we’re continuing to buy companies in the industrial area of the economy including energy, commodities. companies producing copper, iron ore, coal, we’ll continue to buy companies leveraged to growth in the emerging markets like general electric or rockwell collins, leveraged to the aerospace industry. these are companies we think will continue to do well. we are still bullish on the spending in the industrial part of the economy, particularly relative to what the consumer will do because we feel that game could be played out in the near term.
>> what are the inflation risks?
>> well, that’s a good question. six months ago, i would have told you they’re significant. i’ll tell you, recent data indicates that inflation is very, very tame. i think they would indicate that the fed is doing a very good job of maintaining long-term inflation expectations. now, the c.p.i., is it a true indication of real inflation? most would tell you no but as far as the fed’s concerned, inflation is under control and does not have a material effect on valuations in the financial sector right now.
>> thank you very much. david spika, westwood holdings, thank you for joining us. coming up in this week’s edition of “money & sports,” the nhl has ratified its new contract but can the league return to prelockout revenue levels? mike buteau joins us from atlanta coming up.
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Listen Market briefing --- Derek (slow)
Earnings for the quarter --- Su (fast)
Taking stock --- Daniel (slow)
average gained 23 points at 10, 651, s&p 500 up six and nasdaq up a point to 2179, benchmarks ended higher. we’re almost halfway through the earnings season. as of today, more than 200 members of the s&p 500 have reported earnings for the quarter. how do the numbers look? we go to su keenan for a report.
>> derek, according to our analysis of thomson financial data, well over 2/3 of the companies now out with earnings have exceeded analysts’ forecasts. to the scorecard, roughly 72%, or 146 of the 204 companies now out, beat earnings forecasts. 15% came in line and 13% missed the mark. nick raich, director of research, says two trends have emerged so far, the strength of energy earnings and double-digit profit growth.
>> energy revisions have been positive on the earnings front. outside of the energy sector, we’re seeing neutral to negative estimate revisions right now. we have 15% growth expectations for the third quarter. it might be a little high. the trend in the second quarter, the numbers here, consensus was 9% for the second quarter. we’ll probably see that number around 12% when they all come in.
>> and the numbers keep coming in. while today’s stock market was influenced by forecasts from google and microsoft, that proved discouraging for investors, putnam investments kevin cronin remains bullish, naming ebay as a highlight of the earnings season. the internet auction site’s stock rose 20% yesterday after exceeding analysts’ estimates for an almost 17% gain on the week. he views general motors’ miss, profit loss of more than a quarter billion dollars when analysts expected a gain, as the low point so far.
>> in terms of impressing, stock performing quite well, ebay, as well. and amgen. on the disappointing side, ford and g.m.’s earnings highlighted cost structure problems plaguing the u.s. auto industry. daimlerchrysler reports next week and we think that will provide insight in terms of whether the u.s. auto industry will turn around soon.
>> in addition to daimlerchrysler next week, we have a lot of big companies out with earnings including american express, dupont, verizon, texas instruments, all coming at you starting monday. derek?
>> thanks for that, sue. as su mentioned, second-quarter profit from u.s. energy companies have been surging, but a rally in the group may slow. global fund managers are more overweight on energy stocks than any other industry group according to a merrill lynch survey. joining me now, bloomberg news reporter daniel hauck with this week’s edition of “taking stock.” energy stocks did pretty good today?
>> they had a great day.
>> but earnings are expected to be strong. why might the rally slow down?
>> it’s interesting. today’s a perfect example. you would think that with earnings coming in as good as they are and next week’s earnings from valero, exxon-mobil, chevron, all expected to be good. we’ve had oil prices that hit a record $62.10 a barrel this month so you would think there would be tremendous optimism about the sector and many of the investors we talked to, although they’re optimistic about the sector long term, in the near term they’re more cautious. part of the reason is obviously the stocks have been rising for so long with a tremendous rally in 2003. 2004, they were rising over 20% and rising in the first half, as well. and people are getting concerned that we do have such high expectations for earnings as you saw today, halliburton and other stocks that blew away earnings. it’s similar to what happened with the technology sector a few years ago that, people are expecting it so much and you’re coming from a tougher base to beat that the expectations are so high that could be disappointments going forward. the other thing we’re seeing, again, you would think with earnings doing so well and oil prices so high, investors would aggressively look to buy these stocks but in actuality, over the past month, according to state street global markets , money is flowing out of energy stocks.
>> even oil stocks?
>> yes.
>> what about oil? do you see a positive or negative here?
>> that’s an interesting thing about the state street analysis. they, right now, this month, out of the 24 s&p groups, energy stocks ranked 20th in terms of money flows and if you compare that to what was going on in october, the last time we had a really big oil rally, at that time, the group ranked second out of 24. so at that time the oil rally was generating a lot of money coming into the group. this time, it’s not. state street is saying that investors are a little bit skeptical about whether the oil rally can last.
>> even so, though, doesn’t it make a strong case for owning energy shares? couldn’t it still make a lot of money at $40 a barrel?
>> absolutely, over the long term. this is still a great story. you have growth from china and india that will generate huge demand for oil and this week, what we saw with the revaluation of china’s currency. that will make it cheaper for them to buy oil and that was part of the reason oil prices were going up today.
>> let’s cut to the chase, what should investors buy?
>> i think right now what analysts are saying is that you have to be selective. especially with the runup that energy stocks have had, you can’t just be buying the entire sector. one of the interesting things people were saying that’s rather timely with today is that some of the oil service companies and drillers as you saw today with halliburton and occidental and so forth, that did really well, they’re saying these are the stocks you want to buy because they are the ones that will still rally at the end of an oil rally because some of the integrated oil companies have already made their money off of rising oil prices and now will be investing in equipment and so forth and those stocks will do very well.
>> thank you for that information, bloomberg news reporter daniel hauck, “taking stock.” much more straight ahead, stay with us.
