One on One With Mark Keller of A.G. Edwards
Tuesday, August 29, 2006
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LINDA O`BRYON: In recent years, small cap stocks and international issues have been in the spotlight on Wall Street. But our guest tonight says he believes it`s time to take a closer look at large cap stocks. He`s Mark Keller, chairman of the investment strategy committee at AG Edwards. Earlier today, I began by asking him why he thinks investors should be focusing on large caps now.
MARK KELLER, CHAIRMAN, INVESTMENT STRATEGY COMMITTEE AT AG EDWARDS: Well, large caps really attractively priced relative to the overall market. These are by and large very solid companies with relatively low business risks, types of businesses that ordinarily would be priced somewhat more expensively because of that premium. However, they`re at a discount right now. In fact, it`s a discount we haven`t seen in over 10 years, not since the mid-`90s have we seen some of the largest, best-run businesses trading at the lowest valuations among major stocks in the market.
O`BRYON: Well, despite those low valuations, there are other factors that could still pose significant risks. We heard earlier about the consumer confidence index being at the lowest level since November. Won`t a slowing economy undermine potential gains?
KELLER: Well, the slowing economy potentially, particularly if it puts downward pressure on earnings, could hurt the overall market, but these by and large are some of the less risky and less cyclical businesses available within the stock market. I believe that a slowing economy would actually help the relative performance of this group as investors fly to quality, if you will, as they look for lower risk and more stable returns.
O`BRYON: All right. As you mentioned, quality. Which large-cap sectors do you see the most promise?
KELLER: Well, I think the more non-cyclical sectors are the most attractive right now and have the best return potential relative to risk and those would include the entire consumer staples sector, the food, the beverage, some of the major retailers of staples as well as the health care sector, particularly pharmaceuticals and medical devices. O`BRYON: And yet if consumer spending is curbed, won`t that hurt that consumer sector?
KELLER: Well, the discretionary items that consumers purchase could potentially be hurt. In fact, I think what most likely would be in a slowdown, but consumers still have to eat. They still will buy beverages. They still be buy the necessities of life and those small-ticket item pleasures that they want to enjoy. It`s the large-ticket discretionary purchases that typically come under pressure when the economy slows down.
O`BRYON: Now, you have observed that small caps and international stocks are still getting more attention by investors. Why does that interest continue for those sectors?
KELLER: Well, small caps and emerging markets in particular have been great performers for a number of years and we think this was primarily because of, one, the very low valuations that these groups got to in the months right after the bubble, but also because of the very low interest rates that our Fed and every central bank in the world engineered for most of the first part of this decade. Those low interest rates chased capital into the higher volatility, higher risk areas seeking favorable returns. Now we`re in a higher interest rate environment. Central banks are withdrawing liquidity and we believe that eventually, in fact we think it`s beginning now to result in capital coming away from those higher-risk areas.
O`BRYON: Among those large caps, which sectors are especially vulnerable to an economic slowdown?
KELLER: Well, I think, again consumer discretionaries, we were just talking about, those large-ticket areas of the economy and housing is one of those that`s clearly been under pressure for a while. We don`t think that`s over yet. We`d also be concerned about technology and some of the other areas of business capital investments. Those tend to be late cycle areas. Transportation`s come under some heaviness in the market lately. We don`t think that is over, either. In other words, the more cyclical areas which have already come under pressure we think will remain under some pressure for a while.
O`BRYON: OK, but you`re saying that really looking for quality among the large caps.
KELLER: Quality, Yes, we stay with quality. We stay with lower levels of cyclicality and by and large, you can buy these sorts of companies at valuations in the mid-teens right now, which we think in today`s interest rate environment is pretty attractive. O`BRYON: Thank you very much.
KELLER: You`re welcome. Thank you.
O`BRYON: I`ve been speaking with Mark Keller, chairman of the investment strategy committee at AG Edwards.
