Special Holiday Edition
>> welcome back. lot of mispriced stocks every day that are great opportunities. you have to look at the market environment. when the market is very expensive and likely to roll over and you’re in a secular bear market , there’s going to be more opportunity to make money on the short side. when you’re in the beginning phase of a bull market and stocks overall are cheap, you’re going to be better off finding stocks on the long side. now, this is still a very difficult game, a value investor has a huge edge if he invests out of favor if he tries to buck the conventional wisdom, we tries to analyze these companies carefully himself, but compare his view to the general expectations. that’s going to put him far ahead.
>> jump in, barbara. i mean, you know, your job is to find undervalued companies, maybe david looks for more overvalued companies, how do you rebut what he said? and what do you think are the opportunities to make money in this market ?
>> well, it is sort of the flip of what david’s trying to do which is find companies that are out of favor and people don’t have very high expectations for and really find those that will have a good business plan and can execute that over the next few years. certainly, a year ago everything was a value investment. you know, 2003 was a fabulous year because you had somewhat of a profit recovery but you had a tremendous multiple expansion as fears abated in the market over a whole host of corporate scandals, the war. so, there are still good vaults in the market although the market has an overall price-earnings ratio of 12, 13. there are somewhat depressed earnings and there are a number of good values in there.
>> if i had to ask you to only use one metric to find a stock, we just limited you to that, what would you look at?
>> i don’t think i could. if you really had to hold me to one metric because different companies are valued on different things. since i mostly concentrate on large-cap companies, i’m looking at how it will be valued in the public market over the next few years. sometimes companies are valued on a multiple of cash flows, sometimes they’re valued on a multiple of earnings, sometimes it’s on, you know, the net asset value. so, it all depends on how the specific company is valued.
>> how much, michael, do you look at the overall stock market , 2003, a good year for much of the market , if you’re long, that is, and tell us really now how much you look at the overall market returns and say you know what, it gets harder and harder to find value?
>> in term offense the market overall, you’re right. in 2003, all 10 sectors of the s&p 500 were up. we started off in an oversold position and it was a lot easier to find value stocks back then. the whole market was attractively priced. in this kind of market , the average value line stock is trading at a 20 p/e, on the higher end of valuation over the past 20 years or so, so i think it’s more challenging than it was six to 12 months or so ago. in terms of individual stocks, you have to be selective. the quality of the stock leading the market over the last six to 12 months has been lower-quality stocks as david pointed out. so, i think that’s going to change, and that’s what we’re looking towards. it will be a difficult sort of transition period over the next few months.
>> david, should that 20 multiple scare investors that own stocks and does it make you, as somebody that tends to take the short side, happy? >> well, it doesn’t make us happy. we certainly don’t want to see the market go down, but we think the market is overvalued, and, yes, high multiple on stocks does scare us. you look at the nasdaq 100 and the top 40% of the nasdaq 100 companies are selling at an average of about eight times sales.
>> is that too high? is that too high, david, eight times sales?
>> we think it’s way too high.
>> why is that? some of the growth estimates out there are for solid growth. you have earnings that have gone up 50%, 100% for many technology companies. what makes eight times sales too much in your mind?
>> well, often times in bear market bottoms, you know, the s&p bottomed at about seven times earnings. now, certainly the nasdaq 100 companies are higher-growth companies, selling at that kind of multiple is sales, and there are a lot of tech companies still ell selling at 100 times earnings. certainly earnings have come back a lot. you listen to john chambers at cisco and he’s still saying the growth is not there from the corporate buyer, that he might have expected in the state of the recovery. we think there is likely to be a plateau in some of the earnings growth and that these companies are still selling at too high a price.
>> and is now the right time to short much of technology?
>> it’s going to be close. i mean, it’s still kind of scary to be short technology. it depends on what market base we’re in. we are very tactically oriented and i would not advise individual investors to be short technology right now. however, in two weeks we might advise that. it’s still not a game for the individual investor. you know, it’s better left to the professional on the short side because it’s a very dangerous game.
>> ok. we’re going to be back after this short break on bloomberg tv and get into specifics. what stocks should you buy or what should you bet will all in?
