One on One with Stuart Freeman, Chief Equity Strategist at AG Edwards
Monday, March 26, 2007
|
|
|
|
SUSIE GHARIB: Despite the volatility and selling in today's markets, our guest is still bullish. He thinks the Dow will increase by 10 percent between now and year end. Joining us to explain, Stuart Freeman, chief equity strategist at AG Edwards. Hi, Stu.
STUART FREEMAN, CHIEF EQUITY STRATEGIST, AG EDWARDS: Hi. Good afternoon.
GHARIB: Well, given today's market behavior, why the optimism?
FREEMAN: Well, you know what? We're looking at it as an economy that's slowing down. We think it's a mid-cycle slowdown. We're not looking for recession. You know, if you look to see what really keeps consumers moving along, it's typically jobs and the job market still looks good. The unemployment rate is low. You know, we are having some issues with the housing market. It certainly is slowing the economy down. We're only looking for about 2.5 percent GDP growth this year versus 3 and 4 and 5 percent over the last few years. But with inflation slowing down, that should be something that should move valuations of stocks up even though earnings growth is slowing down.
GHARIB: You mentioned housing. How concerned are you about today's housing news, also just this whole trend towards tightening mortgage requirements? Do you think that this is going to weigh down on the stock market?
FREEMAN: Well, I think it's going to certainly have an impact on the overall economy. It's going to show us a quarter or a year that's looking more like 2.5 percent instead of 3.5 percent last year. I think there's a lot of concern about the sub-prime market which is actually a small portion of the total lending market. And, you know, certainly we'll probably see some lower prices in the overall marketplace for homes but, you know, investors or home buyers who are selling a home at a lower price will also be able to buy a home at a lower price if they're buying in the same marketplace, so it has a different impact from our perspective than a decline in the stock market.
GHARIB: On Friday, you increased the asset allocation in your client portfolios, increasing more in equities, 65 percent stock, 30 percent bonds. You decreased the allocation for bonds and 5 percent cash. Why the change especially in view of our lead story tonight about the vulnerability of the markets?
FREEMAN: Well, we made, you know, we made a moderate change. We dropped 5 percentage points on bonds largely because the bond market didn't perform terribly well on the news or the comments of the Fed. Actually for some reason last week, the Fed really didn't make a significant comment, change in comment last week. We thought the valuation there was such that we'd take 5 percent out there and put it in equities. We think stocks are more attractive at this point of the cycle than bonds are and we think the 8 percent earnings growth we're looking for in stocks and the drop in inflation that we see for the year and into '08 should actually give us a better return in equities. Even though the economy is slowing down, the P/E valuations will rise when inflation drops and those P/E valuation or revaluation markets can be attractive marketplaces.
GHARIB: Tell us about some of the stocks that you would recommend for your client portfolios these days. Do you have a favorite one or two?
FREEMAN: Yeah. We like health care companies, the defensive nature and growth rates there. Cardinal Health is a name in that area, a distributor of medical products and of wholesaler of drug products. We think they're continuing to grow share there. We like in the consumer staples area which is another defensive area in the marketplace, Pepsi- Cola, which is doing very well worldwide particularly international with the Frito brand and strong cash flow there. And we think the investors will look more at those types of companies as more cyclical companies' earnings growth slows particularly this year.
GHARIB: Stu, do you own any of these stocks or does your firm have any investment banking relationship with them?
FREEMAN: No, we don't.
GHARIB: And just to wrap it up, any words of advice for investors during this precarious time?
FREEMAN: I think it's important on weakness from our perspective to not be overly concerned about stocks, to look at large cap stocks particularly, large liquid quality companies. Don't concentrate on small companies. Don't concentrate on emerging markets but on large U.S. companies that are really very cheap.
GHARIB: All right. Thank you so much, Stu. We appreciate your thoughts.
FREEMAN: Thank you very much.
GHARIB: My guest tonight, Stuart Freeman, chief equity strategist at AG Edwards.
