Crossmark Global Investments
TheStreet.com: What’s your outlook for the stock market over the next year?
Doll: We’re in a momentum-driven bull market. Predicting the end of it is a fool’s game – impossible. At these levels, with expensive valuations, bulls are assuming a soft economic landing, inflation under control, that the labor market and consumers are okay, and that earnings growth is good.
Bears say the economy is weakening and earnings estimates are too high. They say the consumer is slowing, as evidenced by falling confidence and rising debt. They note that the world is a mess. With valuations so high, things better be close to perfect [for stocks to rise], they say.
I’m cautious, though I’m not a bear.
TheStreet.com: Do you expect a 10% correction for the stock market soon?
Doll: On average, corrections of that size happen once a year. Something needs to go wrong, like a bumpy landing – not a downturn – instead of a soft landing. Or oil prices go up. We might get a 10% correction in the next few months.
TheStreet.com: What do you think about large-cap versus small-cap stocks and growth versus value?
Doll: Small-cap tends to not do well in economic slowdowns/recessions. Anticipation of a slowdown makes me cautious on small-cap. But small-cap is priced so much lower than large-cap that it should do well when the economy comes out of weakness.
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We have growth and value stocks. But for value I don’t just want cheap stocks: they have to have something going on. We want growth stocks for when the economy slows down. Growth does better than value in a slowing economy. Over the next 12 months, I think value will do better.
TheStreet.com: Are there any particular industries that you like?
Doll: We like financial stocks because they’re cheap relative to their history. Their balance sheets are in better shape than typical during this part of the cycle. That because lending has gone outside of banks.
In general, It’s less about sectors now and more about factors. [Important factors include] high and predictable earnings and good — and preferably improving — cash flow. In some ways that describes quality. Those stocks have done fine.
If there’s a period of sloppiness because of a weak economy, those themes will outperform. You can find stocks like that in any sector.
Our Steward Large-Cap Core Fund (SJCAX) has a price-to-free-cash ratio of 13 versus 22 for the Russell 1000. And the fund’s return on equity is 24 versus 22 for the index.
Those ratios are good measures as to which portfolios will work in uncertain times.
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TheStreet.com: Can you discuss three of your favorite stocks?
Doll:
1. Cigna (CI) , the health insurer/pharmacy benefit manager. Its price-earnings ratio is at a 30%-plus discount to the market. Its long-term earnings and dividends have prospects for annual growth of 10%.
It has great fundamentals at a cheaper price. A lot of health-care stocks don’t do well close to elections because of potential health-care legislation. But Cigna has no exposure to Medicaid and just a small Medicare program.
The main risk for Cigna is that its cost-to-revenue ratio is slowly moving higher.
Fund manager buys and sells:
2. American Express (AXP) , the credit card company. It’s growing. As membership and usage go up, so does net interest income. It has a more affluent client base than its competitors.
So it should face fewer problems in an economic downturn. It is selling at a [high] valuation of 20 times earnings. So you hold your nose and buy.
3. Lowe’s (LOW) , the second biggest home improvement company after Home Depot (HD) . There’s a big gap in profitability and returns between the two, with Lowe’s running behind.
But Lowe’s is closing the profit gap. It’s improving inventory and operating controls. And its finances reflect that: It has had good earnings.
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