U.S. companies are earning too much for the bull market to be derailed by speculation that Europe's debt crisis will spread, according to Laszlo Birinyi, who advised clients to buy shares before they bottomed in March 2009
U.S. companies are earning too much for the bull market to be derailed by speculation that Europe's debt crisis will spread, according to Laszlo Birinyi, who advised clients to buy shares before they bottomed in March 2009.
Apple Inc. Ticker:(AAPL) and Google Inc. Ticker:(GOOG) have shown that they can weather market declines, said Mr. Birinyi, president of Birinyi Associates Inc.
The stocks beat the S&P 500 during its 18% decline from April 29 to Aug. 8, with Apple gaining 0.9% and Google up 0.4%.
The top two equity holdings at his firm are cheap, Mr. Birinyi said.
Apple and Google traded at about a 60% discount to their averages before the drop.
Mr. Birinyi remains bullish even in the face of concern that the global economy is heading for a recession. The benchmark gauge for U.S. equities is down 15% from its April high this month. The three-month correction through the index's 2011 low Aug. 8 occurred as investors speculated that the debt crisis that began in Greece was spreading.
Although Mr. Birinyi said that equities won't return much in the next 12 months, he predicts that they will surge after that.
“Apple comes out with the new phone, and on day one, the line will go around the block three times,” he said.
“It's really not going to matter what's going on in Greece,” Mr. Birinyi said. “I'm not willing to give up on the world quite yet.”
RECESSION WORRIES
The S&P 500 sank as much as 13% last month, driving its valuation down to 12.2 times earnings, compared with the average since 1954 of 16.4, according to data compiled by Bloomberg. It was the cheapest multiple since March 2009.
The measure then recovered, trimming the August drop to 5.7%. Stocks plunged last month after Standard & Poor's stripped the United States of its AAA rating and speculation increased that the world's largest economy could enter a recession.
The United States has a “better-than-even chance” that it will enter another recession, Harvard University's Martin Feldstein, a member of the National Bureau of Economic Research committee that determines economic cycles, said Aug. 26.
Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC, this month put the odds at 60%, while JPMorgan Chase & Co. sees the chance of the second recession since 2007 at 40%, according to a Sept. 7 note.
BEATING FORECASTS
S&P 500 earnings are poised to reach a record $99.88 a share this year, according to the average of securities industry estimates compiled by Bloomberg, after companies beat projections for 10 straight quarters. Analysts have grown more optimistic about earnings since the S&P 500 peaked April 29, driving their forecast up from $98.73 a share.
At Apple, profits have exceeded estimates every quarter since at least 2005, while Google has posted earnings growth of more than 15% every quarter since the bull market began.
The S&P 500 is in the third of four phases seen in bull markets: a period of lower returns and slower advances, according to Mr. Birinyi.
Although the index posted losses of almost 20% in the first part of 2011 and 2010, it won't do that again through this time next year, he said.
ENDURING BULL
Mr. Birinyi has remained bullish for the 30 months since March 2009, saying that stocks are in a “multiyear” rally.
The S&P 500 gained 39% in the first three months of the bull market before more than doubling through April 2011. The decline since then pared the total gain to about 71%.
Bull markets since 1962 have produced advances averaging 120%, according to Birinyi Associates data.
Comparisons with previous rallies signal more appreciation, Mr. Birinyi said, reiterating a point he has made at least nine times during interviews and reports since the S&P 500 peaked in April.
As the S&P 500 was sliding last month, he said that the market's upward trend remained intact because companies were still reporting higher earnings.
This bull cycle is most similar to the one that began in 1982 and generated a 229% advance in five years, Mr. Birinyi said. In the last eight months of that rally, the S&P 500 rose 39%, data compiled by Bloomberg show.
“When you have a market that starts off gangbusters, it does not tend to peter out in the short term,” Mr. Birinyi said. “We've been working on that thesis, and we see no reason to change.”
Mr. Birinyi said that he isn't buying financial institutions and health care companies or seeking corporations that pay out dividends.
He has been recommending five stocks this year: BP Prudhoe Bay Royalty Trust Ticker:(BPT), Cummins Inc. Ticker:(CMI), Hermes International Ticker:(RMS), Priceline.com Inc. Ticker:(PCLN) and Ralph Lauren Corp. All have outperformed the S&P 500 since the index reached 1,363.61 on April 29, the 2011 high, except Cummins, which was down 11 percentage points more than the index through Sept. 9.
“With regard to all the emotion, we try to stay away from the possibilities and the potentials,” Mr. Birinyi said.
“Yes, the market could go down. Yes, we could go into a double dip,” Mr. Birinyi said.
“But we try to work off facts,” he said. “And facts are that Apple's trading at 12 times earnings and, even in a worst-case scenario, teenagers are still going to buy iTunes.”
