Large cap growth stocks
Deutsche Bank---Fitzpatrick, Owen---Managing Director / Partner
>> m.c.i. is cutting 7,500 jobs, 15% of its work force. the announcement coming a month after they emerged from the largest bankruptcy reorganization in history. earlier today, m.c.i. announced lost $1.19 a share. sales down 13% as the long distance telephone company faced competition for corporate customers. one analyst says m.c.i.’s profit margins are half those of at&t’s making it hard for m.c.i. to cut prices to attract new business. our next guest invests in large cap growth stocks. his largest industry positions are energy, consumer staples and health care, the best performing three groups year to date. not in that order, though. why he recently increased his holdings. owens fitzpatrick joining me in the studio. a change in your strategy here recently.
>> yes. reflecting the big change we thought that happened on april 2 when we had a big change in the non-farm payroll numbers. we think people should look at their sector weights. >> and what is the change you have made here?
>> the one problem in the economy was lack of employment growth. that has been erased with the last two employment numbers in the past two months. what that will entail is higher interest rates. we have already seen it since april 2. we’ll probably continue to see rates move higher, therefore, making people more defensive in terms of sectors they want to invest in.
>> so is that a long-term call or a short-term call?
>> more short term. once rates start rising, you will see a rotation back into certain industries. going to industries that are going to produce good earnings and stable earnings will be an important factor.
>> are you saying once investors get over it―you know what we have known it is coming and the fed is raising rates, they’ll say they’re raising rates for a reason, the economy is getting better.
>> i think earnings will win out long term. near term, interest rates are the major factor.
>> you said you recently placed a high value on earnings stability. what do you mean by earnings stability?
>> well, it’s really a play on getting out of the economically sensitive sectors. those are the sectors we think will suffer in here with rising interest rates. the ones that produce earnings stability are staples, health care, energy. in any environment they’ll have good earnings.
>> utilities you have gone to zero. nothing to do with utilities. no way.
>> not do with the quality of utilities but when rates start rising, several months prior to that they typically underperform.
>> as far as the dividend play, some people say well, in uncertain times, the markets will go sideways 2%, 3% over the balance of the year, you know, 3.5%, 4% dividend could be a nice thing there? no? ao cue find that in energy, consumer staples yielding well over 2%.
>> this is one of my favorite topics. can markets rise when rates do? we talked about it a little bit. i put together a chart here. let me back it up one if i can. this is the fed rates versus the s&p 500. s&p 500 is the orange line. this is 1983 to 1995. you can see three periods of fed rates increasing during that period of time. every single time the stock market rose. in fact, if you look at when the rates went down most recently from 2000 to date, the markets do terribly. could i not argue the inverse that falling interest rates indicate a weak economy and are bad for stocks?
>> well, you look back over the past couple of years and we had falling interest rates but also a significant decline six quarters in a row of declining corporate profits. we didn’t come out of that quagmire until 2003.
>> which is indicative of a weak economy which is why they were cutting rates. doesn’t it come back to the economy?
>> it comes back―ultimately i think earnings will win out in this environment. the uncertainty and change, it’s a pride aspect of this rate increase. you go back a little over a month ago we were at 3.70% on the 10-year. now we’re at 4.70%. the surprise aspect takes time to filter in.
>> few take a look at some of the other areas that are you looking for, i know you say the large caps are going to outperform small caps because the economy will slow. why is that? just because they’re more predictable, their earnings?
>> more predictable. two, the valuation differential because of the rally in small cap over the past couple of years, valuations are not as large. not only do you get the impact of the economy moderating in terms of the growth rate but you are looking at a valuation differential that is not as great.
>> in terms of the economy’s growth rate, what are you looking for?
>> the types of numbers we have seen the last two quarters. 4% to 4.5% for the balance of the year is what we expect to have.
>> what is your greatest fear? we have 20 seconds left.
>> interest rates in terms of where they will level off. that’s the biggest question.
>> how fast they get there.
>> that’s correct.
>> owen fitzpatrick, wealth manager. citigroup shares close lower after they say they’ll spend $5 billion for litigation costs. we look at big c, citigroup, when we get back.
