Energy stocks
Interview: Brummer & Partners---Doug Cliggott---Chief executive and strategist
>> continuing our special series, markets at midyear. earlier, brian sullivan spoke with doug cliggott, chief executive and strategist with brummer & partners, and he began by asking about energy stocks.
>> i guess i would humbly disagree. it really depends on where you expect oil prices and energy prices in general to be not so much six months from now but maybe 18 months or 24 months from now. the way we look at the energy complex, it’s priced in a meaningful decline in the% commodity price one to two years from now. if the think the commodity price will be sticky and have a hard time going below $30 a barrel, we think energy still attractive.
>> you like the utility group?
>> yes, for a different reason. in a rising interest rate environment i think part of your portfolio you want in low duration assets and in some sense utilities are to the equity market like the money markets are to the fixed income market .
>> yield?
>> high yield but low duration. you’re not betting on what earnings will look like three years or five years from now.% -you wanted regulated utilities% -so you know what you’re going to get.
>> in the tease going into it, into the commercial, we said that a short-term strategy may be the better term strategy. we don’t usually hear you say things like that. what do you mean by and how short term should investors be thinking right now?
>> what i meant by that was i think you can’t have a buy-and-hold strategy, i don’t think, in this environment. look at what happened in the second quarter, the quarter we just lived through. earnings estimates came up five percentage points from 15% expected growth to 20% expected growth. the s&p 500’s been up four index points. nothing.
>> nowhere.
>> nowhere. so it seems to me you can think long term but you have to think long term sector by sector. don’t just put your money an index fund and think it will grow for you.
>> but you have to draw the conclusion, then, if you suggest that, you’re not that optimistic about the overall markets for the next few years.
>> not at all. i think if we couldn’t get anywhere with earnings expectations rising significantly, when we look out% -the next 12 to 18 months, we’ll have slower, not faster earnings growth. and our guess is interest rates will just continue to grind higher and higher.
>> secular bear market right now?
>> i don’t know that i’d call it a bear market . a market that it will be tough to make money in. you have to pick your spots in the market . the market , on its whole, is not going to give exciting returns.
>> one of the groups you do like we showed on a graphic recently was the pharmaceutical group. this is a group that has just disappointed so many people for so long and every time they seem to be out of the woods, some other regulatory or headline crosses. are we out of the woods here on pharmaceuticals?
>> no. i think the short answer is no. i think there are very significant long-term issues. but what we like about pharmaceuticals right now is on a relative valuation standpoint, they’re a lot lower than they were 12, 18, 24 months ago so they’re cheaper. the other real attraction and consumer staples have the same thing, they have non-cyclical earnings. our concern is when we look out to 2005, earnings expectations are too high. consensus is for 11% earnings growth. consensus thinks financials will grow earnings 10% to 11% next year. those numbers to us look very silly. you want areas where you don’t need accelerating economic growth to give you earnings. that’s pharmaceuticals and again
>> it’s more of a story of, hey, pharmaceuticals, at least you know what you’ll get and not be shocked on the upside or downside for earnings.
>> and again, at least some of the names have a lot better valuation profiles than they did a couple of years ago.
>> why do you think that earnings estimates for the financials are overheating?
>> i think we’ve been spoiled. lacking back the last three, five, seven years, financial profitability just improved and improved and improved. but i think a big part of that is the short-term interest rates went down, down, down. now, i think we’re out of a major inflection point in interest rates and i think the trend is higher unless growth really breaks down and so i think we’re just shifting from an idyllic environment for financial services companies to a much tougher one and my guess is the financial sector as a whole will have a hard time growing earnings any faster than the overall economy.
>> will the s&p end the year up flat or down, doug?
>> flat or modestly down.
>> all right, folks, there you have it. securities firms in the spotlight today and going to be in the spotlight for of course the second half of the year. this after posting profits close to record levels. how is the second half looking and how is the weakness in volume going to affect them? we’ll look at that when we return.
