One On One With Phil Dow of RBC Dain Rauscher
Monday, April 03, 2006
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SUSIE GHARIB: Our market guest tonight expects the S&P 500 to increase by at least 8 percent this year, and it could do even better. Joining us now, Phil Dow, director of equity strategy at RBC Dain Rauscher. Hi Phil
PHILIP DOW, DIRECTOR, EQUITY STRATEGY, RBC DAIN RAUSCHER: Hi, Susie how are you?
GHARIB: I`m good, thank you. And we had a pretty good day on Wall Street even though things sort of pulled back. Do you think it was because new money and a new quarter or something else going on?
DOW: Well, you never know what the derivative impact is and my guess is maybe the market got a little bit ahead of itself. But one thing I did notice is in the economic report this morning, the ISM, that the prices paid index was a little higher, indicating that maybe inflationary worries might be picking up somewhat. But by and large this is a market dominated by traders and we`ve got to wait for major events. I think the next major event Susie will be jobs on Friday and then we get to the main event, which is earnings.
GHARIB: And what are you expecting from both of those?
DOW: Well, the jobs report, I`m hoping that it`s 200,000 or under. And I think most people would recognize that as moderate and leave the case for the Fed to maybe make this the last rate hike in the May meeting. In terms of earnings, my guess is we`re going to see much better-than-expected earnings. Right now the consensus estimate is anywhere from 10.4 to 10.8, between 10 and 11 percent for the first quarter. Remember in the fourth quarter, which was economically weak, we had 14.4 percent growth and when we went into the fourth quarter, the expectation was for about 10, so my guess is this time with much stronger economic growth, we`re going to get something like a mid-teens earnings growth rate which should surprise some people.
GHARIB: So you`re looking for a pretty good year overall. Where is that growth going to come from and is it going to be powered by what`s happening on the corporate side with earnings or is it going to be what`s going on in the economy or maybe a little bit of both?
DOW: Well, I think it`s a little bit of both, Susie. I think you hit it on the nose. I think there`s a pretty good case to be made that economic growth may slow as the year wears on after a big, big opening act in the first quarter. Along those lines, I think companies that can grow organically are likely to receive some attention. And those are the companies that have been out of favor for close to five years. So traditional health care companies to traditional insurance could have the ability, possess the ability to grow their earnings I think are quite attractive and could really resonate with investors this year.
GHARIB: So talk us through what you are investing in for your client portfolios. What sectors do you like? What stocks are you investing in right now?
DOW: Let`s start with growth and I would say an out-of-favor stock or a stock that hasn`t done much far long time is Home Depot. That stock is down dramatically and our guess is that it`s maybe trading 20, 25 percent cheap to where it should be. We look for strong earnings from that company going forward. It`s a stock that I personally don`t own, but we do have a banking relationship with. But I think it epitomizes the kind of growth stock I`d be speaking of.
Secondly, health care companies. Medtronic would be one which I own; we do not have a banking relationship. Zimmer in the orthopedic side I do not own. We don`t have a banking - we do have a banking relationship there excuse me. But with both those companies, either late this week Friday or early next week we`re going to get guidelines from the government as to reimbursement rates for their important medical devices and my guess is that you`re going to get kind of a clean bill of health and the numbers basically that people had held in reserve might be too conservative. So I think those stocks are quite attractive both for the near term and the long term. If I`m wrong, it will be a question of near-term timing.
Also, technology. They`re viewed as cyclicals but I own both Cisco and Microsoft. We don`t have a banking relationship with either, but I think "Barons" hit it on the nose with Microsoft. It`s a franchise that`s just getting no respect, that does have a great product right now and has delivered but really hasn`t gotten much in the way of price performance. And then Cisco`s the dominant company in networking and we think is in a position to deliver solid growth both from their organic business, traditional business to the new set top box side of things.
GHARIB: Well, you`ve given us a lot to think about and a lot to. We really appreciate it, Phil.
DOW: My pleasure, Susie, take care.
GHARIB: We`ve been speaking with Phil Dow, director of equity strategy at RBC Dain Rauscher.
