"Market Monitor"-James Stack, President of Stack Financial Management
Friday, August 14, 2009PAUL KANGAS: My guest "Market Monitor" this week is James Stack, president of Stack Financial Management and publisher of the Investech Research Market Letter. Jim welcome back to NBR.
JAMES STACK, PRESIDENT, STACK FINANCIAL MANAGEMENT: Thank you Paul. It's great to be here.
KANGAS: In late March when you were with us, you told our viewers the building blocks were in place for a new bull market and indeed we have seen a huge rally. Is there more to come and what factors will sustain the bulls if so?
STACK: Well, Paul, a lot of the indicators in leadership and breadth are still decisively bullish, so yes, I think we have more potential gains ahead. We have to keep in mind that by historical standards, this market is still way off its highs. Both the Dow and the S&P would have to gain over 50 percent from today's levels to get back to where this bear market started.
KANGAS: Something that seems to trouble Wall Street quite a bit is this fading consumer sentiment we saw today. What can give that a boost?
STACK: Keep in mind, we just had a setback in sentiment. We had a big rally in consumer sentiment and confidence coming out of the March lows. We've had a slight setback and it hasn't followed very much in consumer expectations -- that is, looking six months down the road, so I think we're going to see consumer confidence rebound next month.
KANGAS: How serious a threat is inflation in light of the massive infusion of stimulus dollars?
STACK: Well, inflation will be a problem. It's not a question of if. It's a question of when. Right now we don't have inflation pressures present in the economy because of the slack from the recession, but looking forward, I think the greatest risk or the one warning flag to watch will be the U.S. dollar. If the dollar drops under the lows of last year, that will be a warning flag that the Fed is going to have to push rates up faster, that we're going to have inflation pressures and nothing kills a bull market faster.
KANGAS: So what investment strategy are you recommending to your subscribers at this point?
STACK: Well, we are up to a 97 percent invested allocation. That's our highest allocation since 2003, the first year of the last bull market and we're still following a safety-first strategy. We're focusing on sectors that we feel are going to participate but without taking risks in the financial sector -- in other words, I don't think we're completely through the wash-out in the real estate sector, so we're not buying the banks. We are looking at stocks in terms of valuation not the momentum. I want to buy stocks that are selling at low price-to-earnings and low price to cash flow levels and lastly, we're keeping our eyes open. I'm not blindly bullish. I'm objectively bullish and we're watching for those warning flags even though we don't see them right now.
KANGAS: Briefly, what are your favorite sectors?
STACK: Well, the sectors that normally lead a bull market will be consumer discretionary stocks and we have one recommendation in that area tonight, also, technology stocks. The financial also tend to lead, but at the same time, I don't want to play around in the banking sector to see which ones are going to still run into problems from here on out.
KANGAS: Now in March, you gave our viewers three stock picks. Let's see how they've done since then. Abbott Labs (ABT) down 4.8 percent. Are you still with it?
STACK: Abbott Labs has really been held back because of the health care fears about the legislation and how it might impact the company, but that company is selling at the lowest valuation -- the cheapest level in over 20 years, so yes, we are holding that one.
KANGAS: VF Corp (VFC) has done well, up over 12 percent. Are you still with that?
STACK: Yeah, we're still holding VF Corp. Think of North Face, Lee, Wrangler, they manufacture all those.
KANGAS: And you had one other recommendation which is also very nicely on the plus side, Walgreen (WAG) up nearly 20 percent. Are you staying with it?
STACK: Yeah, Walgreen's is going to benefit as we come out of this recession.
KANGAS: How about some new recommendations, Jim?
STACK: Paul, on the consumer discretionary side, one of the leading sectors, we like Nike (NKE). You don't think of it as such but, it's a global stock. Two thirds of the.
KANGAS: NKE on the big board.
STACK: Two thirds of its pre-tax income is international and a lot of that's coming from Asian growth. We also like Charles Schwab & Company (SCHW). It's going to benefit from the wash-out in the banking sector. It's not just a discount brokerage firm. It's providing more banking services. In fact, we use Schwab institutional as a custodial firm for our managed accounts.
KANGAS: Trading symbol SCHW. OK, one more.
STACK: Correct, correct. Pepsico (PEP). People think of Pepsico as stodgy but it's actually a double-digit growth company. It's selling at its lowest price-to-cash flow in 20 years. It also pays a very attractive 3 percent dividend and it's increased that dividend every year for 37 years.
KANGAS: Jim, do you own the stocks mentioned or have any other disclosures to make?
STACK: Absolutely, Paul, we own all of them. I wouldn't recommend them if we didn't like them and we also use Schwab institutional as our custodial firm as I mentioned.
KANGAS: OK and of course, they would benefit nicely from a big bull market as well, would they not?
STACK: They're all in sectors that should be among the leaders in this bull market.
KANGAS: Very good. Unfortunately, our time is up, but Jim, as always, thanks for being with us.
STACK: It's my pleasure, Paul.
KANGAS: My guest, Jim Stack of Investech Research.
