Mega Performance

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club

A group from Alliance Bernstein headed by Kurt Feuerman has delivered 48% more than the S&P since 2005, and it has done it in one of the most boring and ignored parts of the market: mega caps, companies with market values over $75 billion.

And they favor U.S. stocks. They see the U.S. economy as very solid and growing with favorable credit conditions, and a U.S. consumer with the best underlying fundamentals we have seen in decades.

In fact mega caps right now are priced well below the market-average P/E of 17 to 18, in the 12 to 15 range. And they are that low because, according to Feuerman, hedge funds - who have to short against their positions - are shorting mega caps.

Scan the S&P 100 and some of the 500 for the names.

Solid growth, shareholder-oriented and great earnings power; there aren’t many surprises in this part of the market. And with below-market P/Es, it is definitely worth your time to look at this one.

Next, a double positive in financials

Depressed valuations and under-earning - not the usual recipe for success in stocks. But for the financials, it is the first step to a big turnaround.

The harsh regulatory environment since the crash in ’08 has forced most investors away from financials, but the numbers tell a different story.

Balance sheets are the strongest in 50 years, credit losses are at 30-year lows and charge-offs at the big banks are at 35-year lows. And most expect the overregulation of the banks that has in fact hurt this economy will ease - because it has to - and that will be the last piece of this puzzle. And it will unleash massive earnings leverage when it does.

The one name I have seen come up is Wells Fargo (NYSE: WFC). It has a P/E of just 12.5 for this year and only 11.5 for next year’s earnings, and a target price of $69 up from its current $51.

But look at all the big names in finance. Financial ETFs, which are a good measure of what the sector is doing, are showing P/Es of 14 to 15, well below the market-average P/E of almost 18.

Underperformance is always a precursor to a run-up. Look at the financials.

The Ugly Baby “Slap in the Face” Award

And yes, thanks for hanging around for the “Slap in the Face” Award.

This one goes out to all the plastic surgeons and lawyers in China.

A Chinese man recently sued his wife for being ugly, and he won.

Really!

It seems the couple was married and when they had their first baby, it was really ugly and did not resemble either of them to such a degree that the husband assumed there had been some hanky-panky.

The wife finally came clean.

She did not have an affair but admitted to having had significant plastic surgery to make her more attractive. The baby simply looked like her - the old her.

The husband still sued and a Chinese court agreed and gave him $125,000 for his pain and suffering.

 

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