PI: In this kind of market people advise staying away from small, risky stocks.
Patrick McVeigh:
I define risk more as the strength of the balance sheet than the size of the company. We won't own any company, regardless of size, that doesn't have a strong balance sheet.
We're seeing many large companies on their knees right now because of their balance sheets - five stocks in the Dow Jones 30 have dividend yields higher than their stock price - I've never seen that before. That's because of their crummy balance sheets. There are also high quality blue chips like Procter & Gamble that are cheaper than they've been in a long time and look like good values. IBM is a stock we're looking at - they're a strong company that seems to be getting into everything green and they'll handle a lot of the consulting around the health care proposal.
We're being cautious about some of our European investments. Europe has more potential bad loans than the US and we think it's likely the Euro will remain a weak currency. As a result, we're trying to control our exposure to the Euro while still owning large holdings in Vestas and Novozymes.
PI: What's your sense on when the economy will come out of this?
Patrick McVeigh:
We have told our clients they should expect the economy to remain poor throughout 2009. We believe unemployment will be over 10%.
But we will continue to look for signs that change is occurring - that some things are no longer getting worse. We may be seeing the first signs that the housing market could hit bottom in the next 3-4 months.
When the economy is growing strongly, it's almost impossible to see what could end that growth. Similarly, during a global recession like we have now, it is almost impossible to see what will make growth turn positive. While we don't want to jump back into the market just to take another hit, we do think investors should look with a "fresh eye" for signs of change. Are things just as awful or do they seem just a bit better? When things are less bad around the margins, that's when the stock market usually starts acting better. The stock market doesn't wait for everything to be great.
The amount of cash sitting on the sidelines now (almost $8 trillion) is at or near record levels. It's greater than the value of all the stocks in the S&P 500 Index. People have been buying T-Bills and getting essentially no return - they don't know where to put their money. At some point, people will put their money back in - they can't accept zero returns forever. While we need to be patient through this period, high quality stocks look very cheap. We believe they will provide above average returns over the next 3-5 years.
We firmly believe we are seeing a shifting of the old guard to the greening of the future. While many blue-chip stocks of the past 50 years are hovering near bankruptcy, the green-chips are beginning to assert themselves.
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