Reading List - February 2, 2011

Time for value to lead to market?

For most of 2010, several investors were overweight growth stocks compared to value stocks (i.e. stocks included in the Russell 1000 Value Index), primarily due to these companies having more earnings power and increasing international exposure.  Over time, the valuations of these companies should become stretched, and investors will look to value stocks for increasing returns.  2010 earnings for Corporate America have been positive and economic news has been increasingly positive.  These two factors largely drive "value outperformance."

Key reasons why I believe value will outperform growth include:

• These companies are trading at historically low valuations based on a P/E basis and cannot trade at these levels forever
• Several of these "value" companies have attractive dividend yields (often higher than where Treasuries are currently trading).  In research done by Jeremy Siegel, half of an investors return typically comes from dividends.  Earnings for these companies will increase and companies will be able to pay out these higher earnings through higher dividends.  In addition, investors will be more concerned with preserving capital and will look to dividend stocks as one way to do that.
• Large companies that would be included in this category have large emerging market exposure.  Over time, these large multinationals will be levered to emerging market economies and should see higher earnings.  In addition, the USD should decline relative to these other currencies making these earnings worth more when converted to USD.
• These companies have fortress balance sheets with tons of cash.  As Jamie Dimon, companies are going to realize they are earning zero and can invest in several ways including re-investing in the business, acquisitions, or share repurchases.

Growth Trade Poised to Fizzle in Recovery Where Stock Market Goes to Value (click here)

Yum profit rises

I do not like to get to caught up in quarterly earnings, but was impressed by the earnings YUM reported.  Essentially for 4Q, YUM EPS was $0.63 versus analyst consensus of $0.60.  Most of the growth came from China.  As one analyst noted:

Their brand name is very strong there and they’re taking advantage of that by opening a lot of new stores

Yum Profit Rises on Growing Sales in China at KFC, Pizza Hut (click here)

Pact with the devil?

Bill Gross of PIMCO just unleashed in his latest commentary.  I would recommend reading the article below because I cannot agree with it more!  Here is a taste:

We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again. We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship. We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up. America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system. It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola. Are record corporate profits a fair price for America’s soul? A devil’s bargain more than likely.

And I cannot agree more than with his opposition "devils" at central banks use to battle deficits!

Central Bankers Strike 'Devil's Bargain'; 'US Heart Transplant': Gross (click here)