2013 Market Outlook: Seven Reasons to Stay Bullish on Stocks

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club

At an investment conference at the St. Regis in Deer Valley, Utah last week, I heard a number of investors express skepticism about the latest surge in the stock market.

“It’s not going to last,” said one. “There are just too many headwinds.”

“It’s a bear market rally,” offered another.

Perhaps not.

We’ve all heard the negatives about the economy and the stock market. After all, the national media recycles them endlessly: The economy is weak. Unemployment is high. Consumer confidence is low. Banks aren’t lending. Businesses aren’t hiring. The real estate market is swamped in a sea of foreclosures. The Eurozone is coming apart at the seams. The national election is so uncertain… and we face a “fiscal cliff” at year-end.

But there are plenty of reasons to stay bullish on stocks. Here are seven of them:

  1. Inflation is low. And it may well go lower. After all, oil and natural gas are sharply lower this year – and so are the prices of many other commodities. This will increase operating margins for manufacturers and purchasing power for consumers.
  2. Interest rates are still zero. This is unfortunate for savers, but positive for consumers and businesses because it makes it so cheap to borrow. It also makes cash awfully unattractive relative to dividend-paying stocks.
  3. Huge new markets are opening up overseas. Domestic consumption is rising in Asia, Latin America and Eastern Europe. And emerging markets make up three-quarters of the world’s landmass. They also make up roughly 85% of the global population. These folks are going to need everything we in the West take for granted: homes, cars, computers, cellphones, microwaves, dishwashers, credit cards, mortgages, health insurance and so on. This will be an engine of global growth for years to come.
  4. Valuations are low. Even though the market has rallied, stocks are still cheap. The companies that make up the S&P 500 are selling for just 12 times earnings. That’s much cheaper than the historical average P/E of 16.
  5. Equity funds are experiencing heavy net redemptions. It sounds counterintuitive, but it’s actually a positive thing when shareholders are cashing in their stock funds. Why? Because history shows the average fund investor has horrible instincts, piling into stocks when they are most expensive (as they were, for instance, during the internet bubble 12 years ago) and bailing out when they’re cheapest (as they were at the market bottom three and a half years ago). Take some consolation from the fact that they’ve been cashing out in droves this year.
  6. Stocks yield more than bonds, a historical anomaly. In the first half of the twentieth century, if you had done nothing more than buy stocks when they yielded more than bonds and sold them when they yielded less, you would have timed the market perfectly. Unfortunately, this technique stopped working in 1958. That was the last time that stocks yielded more than bonds… until the past year. With bond yields at all-time lows, stocks now yield more. And if history is any guide, that makes now a good time to buy them.
  7. Corporate profits are at all-time record levels. This surprises many investors, but it’s true. In fact, it’s been true for each of the past nine quarters. If you want to know why the stock market has kept pushing higher through all the gloom and doom, it’s because of this: Share prices follow earnings. And earnings – despite all the naysaying – have never been better.

Stock market investors have a strong tendency to think emotionally rather than rationally – and then regret it in the luxury of hindsight.

2013 Market Outlook: Seven Reasons to Stay Bullish on Stocks

In the end, of course, markets make opinions, not analysts. So judge for yourself. Above is a three-and-a-half-year chart of the S&P 500. Does that look like a bear market to you?

Good Investing,


Editor’s Note: On Monday, Alex alerted Investment U Plus readers to expect another earnings surprise from Whole Foods Markets (Nasdaq: WFM) on Wednesday. This, despite Wall Street hammering down the stock because of a poor report from Chipotle Mexican Grill (NYSE: CMG). They wrongly assumed that the same factors causing a dip in Chipotle’s earnings – namely higher commodity costs – would put a dent in Whole Foods’ quarterly earnings. Just as Alex predicted though, their assumptions couldn’t have been further from reality.

Readers who acted upon Alex’s alert gained 10% on WFM in less than a week due to the company’s fifth straight earnings surprise. And today Alex has provided readers with another Momentum Alert pick that has been rapidly increasing earnings.

For more information on today’s recommendation along with how to get this type of market intelligence with every issue of Investment U, click here.

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Which Stocks to Be Bullish On

With the overall markets trading in such high correlation these days, investors need to work harder to find the outlier stocks that will keep them in the black.

And as Alex has written many times before, the only reliable indicator of a stock’s future performance is earnings growth.

Warren Buffett’s mentor Benjamin Graham famously said, “In the short term, the market is a voting machine, but in the long term it is a weighing machine.” What it weighs, of course, is corporate profits. A company’s true value will in the long run be reflected in its stock price. Bank on it.

This bottom-up investment philosophy is the root of all of Alex’s picks. That’s why sometimes you’ll see picks with relatively high P/E ratios. This is because in growth companies, P/E doesn’t really matter so much. It’s more about consistently increasing earnings quarter after quarter.

And one company Alex recently recommended in his Momentum Alert (MAL edmen link only in IUP/A) trading service is doing just that – Align Technology (Nasdaq: ALGN). Although the stock slumped leading up to its earnings release this past week, it’s bounced back with a vengeance after handily beating Wall Street expectations.

Align saw its earnings more than double in the second quarter. Profits rose a better-than-expected $0.34 a share, compared to $0.14 a share in the year-ago period. Revenue rose to $133 million, on a 25% increase in shipments.

And here’s why Alex thinks the company is exactly the type you should be bullish on right now:

“Based in San Jose, Align is a medical device company that pioneered the invisible orthodontics market.

“Millions of Americans want to correct a little crowding or other minor malocclusions, but have traditionally avoided orthodontic treatment because they believe it is too expensive. It’s not anymore.

“Align’s patented Invisalign system, which was launched in 1999, is today distributed through 70,000 trained dentists and orthodontists in more than 45 countries, including China. The company has manufactured 91 million aligners and shipped over 1.8 million cases to date. Even teen heartthrob Justin Bieber boasts in a YouTube video that he has Align Technology’s Invisalign on his teeth.

“The cost for an Invisalign treatment – which usually takes 18 to 24 months – is about $1,500, much cheaper than traditional, non-digital orthodontic work. The market for these treatments – which was $1.6 billion in 2010 – is expected to hit $4 billion within three years.

“The company’s business prospects should put a smile on your face. The numbers are already exceptional. In the last 12 months, sales topped $500 million. In the most recent quarter, earnings jumped 33% on a 29% increase in revenue. And profits, which are likely to hit $1.20 a share this year, should rise to more than $1.50 in 2013.

“This is an industry with high margins and little competition. (No wonder insiders own 22% of the outstanding shares.) And Align announced a $150 million share repurchase program a few months ago.”

– Justin Dove with Alexander Green

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