The average estimate
Interview: Evergreen Investments---Lynch, John---Equity Strategist
>> we’re back and i have fresh news for you, we call them headlines here. they have to do can sonic, the hamburger chain. the first-quarter earnings per share 31 cents. earnings per share at 31. the average estimate from thomson was for 30. going forward, they see the second quarter at 23 cents and that matches the current average forecast from thomson financial. they’re also going to boost their full-year forecast range and they see that the mad cow incident hasn’t affected their sales trend. there’s the word on sonic, sonc, the stock in regular trade today was up 3.5% on the news. we look in extended trade right now, it is really adding only four cents to that price. also today, starbucks boosting its latest forecast. this after december, its full-year 2003 forecast, that’s what we want to say, this after december same-store sales rose 11% thanks to strong holiday demand for eggnog lotas. that was this month’s highest same-store sales gain in 11 years. full-year profit will be 84 to 87 cents a share, as much as four cents better than the prior estimates. fiscal first-quarter earnings per share, 25 to 26 cents and in after-hours, the stock is on the rise. on to our guest we go, even though our next guest says that stocks will go up 10% in 2004, he expects the economy to grow between 3.5% to 4% for the year, which is below so-called consensus. john lynch, chief market analyst with evergreen investment joins us from charlotte, north carolina. john, why is the consensus wrong here? you said that valuations or the estimates of the average estimate is too high. why are you right and they wrong?
>> hi, matt. i’m looking at the overall economy and i suspect g.d.p. will slow in the second half of the year. we have a tremendous amount of catalyst supporting g.d.p. in the first half of the year surrounding business investment and tax refunds supporting consumption through the first half of the year. i suspect that in the second half of the year, those trends will moderate, therefore slowing the ability of u.s. corporations to generate such significant profit growth in 2004.
>> it was interesting, comments here regarding the question, value versus growth and you prefer growth but right now you say there are not compelling valuations for either. where do you go? value or growth? if neither looks good.
>> i think diversification is key for investing and investors need to focus on proper allocation between the two. i just don’t think the valuations right now suggest table-pounding overweight for value or growth. i suspect that in the growth environment right now we are expensive at the margin. i would encourage investors to look for companies with strong cash flows and ability to increase their dividends going forward and i think that will balance the growth-value dynamics in one’s portfolio.
>> somewhere that you do like valuations is in the healthcare group. what valuations, in particular, most excite you about the healthcare group?
>> certainly. well, looking at the healthcare group as a sector, first of all, the group is trading at about 15 times the p.e. ratio and looking at earnings right now to grow about 15%. and looking at that p.e.-to-earnings-growth-rate ratio of 15-15 or 1.0, that is the most attractive valuation in about 10 years and investors, getting more specific, should look at companies that are more diversified. i wouldn’t just go with a company focusing purely on one area. i like companies in hospital supply, diagnostics, companies such as abbott labs, medtronics, j&j.
>> also, interestingly, i notice you said you were underweight in telecom and utilities because of regulatory issues. and corporate pressures and excess capacity. but tragically, at least if that is your portfolio holder, telcos have been one of the top performers over the past three months.
>> you’re right. the trade has been with telecom. what i’m recommending to investors now is try to not to chase that trade because there are still some fundamental difficulties with that sector to contend with, namely excess capacity and ability to service debt and the potentially rising rate environment later this year and some of the regulatory and pricing issues that should weigh on the stocks later on this year.
>> the time to change to telecom was late march, the group is up 20% since that period of time?
>> absolutely. i think we missed that one.
>> do you think this is over with? do you think this is bottom fishing for a group that lagged as the worst performer for all of 2003? do you think this is just a bounce or something fundamental in terms of change in leadership?
>> i think the trade is on, but i don’t think there’s much left to it and you’re exactly right, they were the most beaten down so they’re x percent from an oversold level. right now i think they’re richly valued at this point.
>> we’ll leave it there and certainly appreciate your joining us here and we’ll have you back again. john lynch, chief market analyst with evergreen investments in charlotte, north carolina. nick saban’s chief is -- nissan’s chief is close to achieving the last of three goals he set for the automakers, this on hinging on goals for the states.
