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Get Four
|  | APRIL 12, 2005
Still Bullish After All These YearsEver the optimist, Joseph Battipaglia figures oil prices should drop, lifting the the S&P 500 to 1300 by yearendJoseph Battipaglia, executive vice-president and chief investment officer of Ryan Beck & Co., is legendary as a bull, and despite the recent downdrafts, he's still optimistic. He expects the Standard & Poor's 500-stock index to end the year around 1300 (it closed at 1181 on Apr. 8), basing his prediction on expectations that corporate profits will expand 9% this year, the Federal Reserve will hike interest rates in quarter-point increments, and investors will find equities attractive. A critical factor would also be drops in oil prices, Battipaglia adds, and he thinks they're coming. "It's very possible that oil prices will back down into the $40s, as supply and demand become more visible and excess inventories become more pressing," he says. However, energy isn't one of the sectors he finds most attractive currently -- he names consumer nondurables, industrials, health care, and emerging markets as his favorites at the moment. For investors interested in emerging markets, Battipaglia recommends the iShares MSCI Emerging Markets Index fund (EEM ). Asked to name a favorite U.S. stock, he comes up with a trio as "particularly attractive: Accenture (ACN ), Bed Bath & Beyond (BBBY ), and Pogo Producing (PPP ). These were some of the points Battipaglia made in an investing chat presented Apr. 7 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and Karyn McCormack. Edited excerpts follow. AOL subscribers can find a full transcript at keyword: BWTalk. Q: Welcome, Joe. A: Happy to be with you. I think the timing is quite good after a very difficult March. I'm happy to see the market get a little momentum here, and oil prices give a little bit of ground. So clearly we have a lot to talk about here. Q: The market was going your way today, Joe -- do you expect to see more of the same? A: I think we will, and I base that on an expectation that corporate profits will expand by 9% this year, the Fed will keep raising short-term interest rates by quarter-point increments, and investors will find U.S. equities and emerging market equities an attractive place to be in that type of environment. Critical to the success of that forecast would be further drops in oil prices, which I believe are coming. Q: What do you think of financial-services stocks? A: Generally speaking, when it comes to financial services, I don't expect the same performance as that which was achieved over the last three years. Rising interest rates have cut into profit margins and have slowed the volume of loans, particularly in the mortgage area, and competition continues to be very fierce for depositors' dollars. I would say, from a value point of view, Citigroup (C ) and JPMorgan Chase (JPM ) look interesting, but given the size of those organizations, full recovery is long in coming. Rank-and-file banks, which are now trading at premium multiples to the market and record-level multiples to book value, would be a good place to take some profits, as their previous growth rates are unsustainable. The big market players, represented by such brokers as Goldman Sachs (GS ) and Morgan Stanley (MWD ), should have very good earnings profiles in '05 and '06, and as a result will also have some upside potential. Q: How about this storage giant in tech -- EMC (EMC )? A: For many of these companies, earnings recovery is clearly under way. Lingering valuations from the bubble have kept these stocks from moving higher. I've noticed with a number of companies, like Western Digital (WDC ) and Sungard Data Systems (SDS ), that as these earnings come in, the valuations are starting to expand once again, and in some cases, private equity investors are stepping in with take-out offers. While I'm not suggesting the same for EMC, I would say with storage companies that filling of the void with earnings is keeping pace by quarter, and the next four or five quarters present an opportunity for valuation lift. An investor may well be early on some of these names, as skepticism still reigns, but quarter-after-quarter improvements in operating results eventually will prevail. Q: Joe, what sectors (or individual stocks) look most promising to you in this market? A: The sectors that look most promising include consumer nondurables, industrials, health care, and looking globally, emerging markets. I would continue to take profits out of the rate-sensitive sectors, particularly housing and certain financial institutions, along with high p-e growth names that are beginning to lag, specifically names like eBay (EBAY ), Starbucks (SBUX ), and International Game Technology (IGT ), for example. Q: Will oil stocks -- Valero (VLO ), Ashland (ASH ), Murphy Oil (MUR ), Exxon Mobil (XOM ) -- keep their value in 2005? A: It's very possible that oil prices will back down into the 40s, as supply and demand become more visible and excess inventories become more pressing. In that environment, oil company stocks should do very well, as far as earnings go. For the larger companies like XOM, a lot is already baked into the prices.... The other names could very well go up based on takeover speculation, since many large multinational oil companies have a hard time opening up new fields and may well decide that acquiring new reserves is a cheaper way to go about it. In that case, whether you have refining capacity or upstream reserves, these companies could be attractive takeover candidates. But be careful, because the eventual takeover price could be below where expectations take it to. Q: What do your charts tend to say the direction of the market is? A: Well, I'm not a chart reader, nor a technician -- my world is all about fundamentals on the economy, valuations, and cycles. But I think after a good-size correction in the month of March across all indexes, I think the short-term direction will be higher in the weeks ahead, and I believe that by yearend we'll see another 9% or so on the S&P 500. Our target for the S&P 500 this year is more than 1300. Q: You've talked about emerging markets -- how do you suggest investors play them? Specific stocks, mutual funds? Any areas you like best? A: My favorite way to play it is the EEM exchange-traded fund. Its longer name is iShares MSCI Emerging Markets Index. It gives investors excellent access to emerging markets -- it's a more volatile index, but these regions tend to be volatile. I do believe that these markets will give a relatively better stock market performance than the more established markets around the world.
BW MALL
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