Strategist Jeff Saut Cautious, But Likes Certain Dividend Stocks

It's been a while since we've checked in on what market strategist Jeff Saut has had to say. Given the drastic run up in equities this year, Saut is cautious. Yet while he's cautious, he doesn't want to bet on the downside.

This is because he thinks there's a likelihood the market could just as well see a sideways consolidation. In general, Saut has long believed it's imprudent to be bearish because a turn in the economy would translate into profits exploding, inventory rebuilding, and a capital expenditure cycle, topped off with a reduction in unemployment.

Lack of Down Days in the Market

Saut is most intrigued by the fact that the market has been able to jump over a ton of hurdles (a 21% rise in the price of gas being one of them).

He writes, "the SPX has now gone 35 trading sessions in 2012 without suffering a 1% down day. There have been 12 other years since 1928 where the SPX has traded higher for 30 sessions, or more, without a 1% down day. In all but one of those occurrences the SPX was higher at year's end with a median gain of more than 15%."

Dividend Stocks Saut Likes

So while he does think this bodes well for the market, he is still a bit cautious in the near-term as the market's recent rise has felt "unnatural" to him. As such, he has recommended the following conservative dividend stocks: Abbott Labs (ABT), Aflac (AFL), Chevron (CVX), McDonald's (MCD), Norfolk Southern (NSC), and Huntington Bancshares (HBAN).

Embedded below is Jeff Saut's recent commentary:



You can download a .pdf copy here.

For more recent market commentary, yesterday we posted up Eric Sprott's February commentary on why 2012 is the year of the Central Bank, as well as Passport Capital's John Burbank saying this is a stockpicker's market.

Stocks vs Bonds & Risk vs Reward: Value & Risk in the Eye of the Beholder

Herbert Abramson and Randall Abramson's Trapeze Asset Management is out with their second quarter market commentary and in it they touch on two choices that often confound investors: stocks versus bonds and risk versus reward. They argue that both stocks and bonds involve risk but given the current potential reward each offers, the choice is a no-brainer: stocks. Given the low rates associated with bonds these days, they believe these vehicles are more akin to cash than investments.

In particular, Trapeze (like many other value investors) have shifted their focus to undervalued large-cap stocks. The interesting dynamic here is that this is essentially the first time investors have been able to purchase such high quality companies at what many are deeming cheap prices. You'll recall that during the panic, cyclical and leveraged businesses declined the most and then subsequently rallied the most during 2009. High quality stocks were seemingly left behind and this theme has been highlighted by numerous managers and strategists including Jeremy Grantham, Legg Mason's Bill Miller, hedge fund manager Whitney Tilson, and many more.

Trapeze interestingly intertwines compelling valuations with contrarianism by highlighting the current investor distaste for equities. Just yesterday we highlighted how market strategist Jeff Saut viewed massive equity fund outflows as a possible contrarian indicator. Investors are fearful of numerous economic factors ranging from unemployment, to a double-dip recession, to deflation. This resulted in a stampede into bonds. Such positioning requires a dose of macro outlook and Trapeze's viewpoint appropriately falls in line with the "no double-dip" crowd.

Trapeze writes, "It has been argued that, if one takes a longer term horizon to smooth out the fluctuations, equities can be viewed as long-term bonds with an earnings yield in lieu of a bond yield and often with a fixed dividend yield, mostly reliable, mostly growing. In the current environment if one takes, say, a 5-year horizon to even allow for the possibility of an interim double-dip recession with a lower stock market from a poorer outlook for earnings, stocks should still be the preferred asset class in that extended period."

Many investors have often quoted Warren Buffett in saying, "Be greedy when others are fearful." Investors certainly seem more fearful of equities than they have been in quite some time. While equities haven't experienced extreme declines in absolute value, many investors have traded in their stocks for the supposed safety of bonds. And the problem with that, Trapeze argues, is that cash is desperately searching for return and yield; something that is currently better found in stocks than bonds. They feel that eventually all of the cash and fixed income parked on the sidelines will seek higher returns, eventually ending up back in equities.

In terms of specific stocks, Trapeze offers Clorox (CLX), Aflac (AFL), Kroger (KR), Aetna (AET), Hewlett Packard (HPQ) and Jack in the Box (JACK) as some of the large-cap stalwarts that they've been playing. Additionally, they also continue to hold positions in Oracle (ORCL), IBM (IBM), Walgreens (WAG), Wal-Mart (WMT), Mastercard (MA) and more.

For the bullish case on equities, we highly recommend reading Trapeze Asset Management's second quarter letter to investors in its entirety, embedded below:



You can download a .pdf copy here.

In the end, it's an epic and ongoing debate: stocks versus bonds, risk versus reward. Add in your stance on the macro environment and the decision is essentially made for you. However, what Trapeze is trying to illustrate is that such extreme pessimism (among other factors) can be interpreted as an opportunity for contrarian optimism. We'll end with another quote from Trapeze's letter: "Like beauty, value and risk too are often in the eye of the beholder."

To see what stocks prominent hedge funds have been investing in, head to our brand new quarterly newsletter, hedge fund wisdom by market folly (receive a free sample here). And if the above article is just too bullish on equities for you, last month we presented the opposite side of the coin with David Gerstenhaber's hedge fund Argonaut Capital who thinks that deflation is the greater risk.

Analysts' Best Stock Picks For 2010

Raymond James' global research is out with a list of their analysts' best stock picks for 2010. Our previous post on this list was taken down due to the list not being distributed to the public yet. So, now that it is available publicly, here is their list. Their picks from this past year (2009) was up 52% compared to an S&P return over the same period of 30.1%, so they've outperformed by a wide margin. In fact, their annual list of stock picks has outperformed the S&P 500 in all year but one since 1996.



Their goal is to identify stocks that will produce "above-average price appreciation" over the course of the next year. They certainly did that with their 2009 list and so let's see if they can do it again with their impending 2010 selections.

Investment theme and stock pick lists for 2010 seem to be popular amongst the various financial institutions right now heading into the new year. Just yesterday, we covered the top ten investment themes for 2010 and how to play them. We've also detailed the top ten stocks held by hedge funds as well. Today we drill it down to specific stock picks for the new year courtesy of Raymond James. As always, take everything with a grain of salt as these reflect their own opinions. Without further ado, here's the list:


Analysts' Best Picks for 2010

1. Aflac (AFL)
2. Alpha Natural Resources (ANR)
3. Altera Corporation (ALTR)
4. Bank of America (BAC)
5. Best Buy (BBY)
6. Chevron (CVX)
7. Concho Resources (CXO)
8. CVS Caremark (CVS)
9. FLIR Systems (FLIR)
10. National Oilwell Varco (NOV)
11. Nuance Communications (NUAN)
12. Sybase (SY)
13. TD Ameritrade (AMTD)
    

Let's dive into some specifics regarding each of their picks:

Aflac (AFL): Raymond James likes Aflac because they feel there is room for growth from supplemental health insurance products. Additionally, they fancy AFL's entrance into the group market. Overall, they feel they will see continued long-term demand. Finally, RJ writes, "Our price target of $60, established on October 29, assumes a normalized P/E on our 2010 EPS expectation of 11.7x less expected investment losses of $2.35 per share. The normalized P/E target is a 20% discount to the then current S&P 500 P/E of 15.6x based on a mean 2010 EPS estimate of $71.17."

Alpha Natural Resources (ANR): Their pick here is based on valuation as well as leverage to the metallurgical coal market, an area that is strengthening. They are also well diversified in other areas and have a solid balance sheet. RJ's main thesis here is valuation based as they write, "Our $52.00 target price factors in our target multiples on the various metrics including 15x P/E ratio, 7.5x P/CF, and 7x EBITDA, which fit within the historical trading ranges of ANR, along with a long-term DCF analysis. Note that this does not include any value for the ~330 Bcf of natural gas reserves, which we believe is easily worth another $5.00 per share, with upside over time through its Marcellus acreage."

Altera (ALTR): Raymond James has selected Altera due to their positioning to capitalize on programmable logic devices (PLDs). They think ALTR will outpace the semiconductor industry in growth by 2x over the course of the next few years. Their analysts write, "ALTR shares remain one of our favorite ideas with a 12-month price target of $29, based on a 23x target P/E multiple to our 2011 EPS estimate of $1.25. This multiple is a slight premium to the shares' 21x historic P/E average over the last three years, which we believe is conservative given Altera's solid business model and leadership in the industry."

Bank of America (BAC): Their tagline on this stock is simply "superior upside potential." As we have covered previously, numerous hedge funds agree as BAC is one of the most popular stocks amongst hedge funds. Analysts at Raymond James feel an oligopoly has emerged in US banking and BAC is right up there with the best in risk-based pricing as they write, "Trading at only 69% of book value and 131% of tangible book value compared to the recent industry averages of 114% and 164%, respectively, shares of BAC offer attractive risk/reward pricing and compare favorably to large-cap peers. Bank of America has already received approval to pay back its $45 billion in TARP funds and we believe a CEO announcement is imminent, both of which should receive a favorable response from the Street."

Best Buy (BBY): RJ's analytical team feels Best Buy can continue to capitalize on the demise of Circuit City as they will continue to gobble up market share, expanding returns. Improving operating margins and an increasing consumer base is boosting BBY's performance and they feel management is one of the best in consumer electronics. RJ writes, "Our $52 price target was reached by placing a ~15x multiple on our FY11 EPS estimate of $3.45, which represents a 16.7% discount to its historical three-year average of 18x."

Chevron (CVX): Chevron is the 'best positioned' among the integrated oil plays, RJ says. This is due to their above average oil focus, their drill-bit track record as they have the highest resource replacement rate, and lastly their small refining segment which should benefit them as they feel those with large exposure to refining will suffer going forward. Raymond James' analysts write, "Quite simply, we believe Chevron should be a core long-term holding for energy investors. Our $92.00 target price is based on ~11.6x our 2010 EPS estimate of $7.92, a slight discount to the mean 2000-2009 P/E. Inclusive of the current 3.5% dividend yield, our target price implies total return potential of 18%."

Concho Resources (CXO): Their pick here is mainly due to high returns in the Permian Basin as the vast majority of their revenues are tied to the price of oil. Of CXO, RJ's analysts say, "Concho generates some of the highest cash margins in our E&P group. One of the company’s core plays, the Yeso, generates an 80% internal rate of return at $70/Bbl oil. Concho is also one of the best in the entire E&P universe on production growth per debt-adjusted share (~35% vs. 3% for the peer group)."

CVS Caremark (CVS): This selection is based on the fact that CVS's model is not broken and that valuation is still attractive. They argue that the worst is behind this name and that going forward retail tailwinds will be behind them and they will see improvements in their Long's acquisition. Raymond James analysts argue that CVS now has compelling relative valuation and that you could potentially be getting their PBM essentially for free. They write, "With expectations reset, the potential for an improved 2011 selling season, and continued share gains in retail, we believe shares are poised to expand off of these trough valuation levels, especially if management continues to deploy significant levels of FCF to share repurchases. Our $39 price target represents 13x 2011 EPS of $2.95, toward the low end of historic ranges." Back on November 5th on our Twitter account we actually mentioned that Lee Ainslie (hedge fund manager of Maverick Capital) was supposedly very keen on shares of CVS at an investment conference that took place before the recent disappointment. We'll have to see if he still favors it going forward.

FLIR Systems (FLIR): Their bullishness on FLIR is attributed to rising orders and what they deem to be attractive valuation. FLIR is a pure play on thermal imaging and infrared technology, an area with lots of growth potential. They write, "As time progresses through next year and investors value FLIR on 2011 earnings, we believe the stock can reach the $40.00 range as its multiple expands toward the historical average. Our $35.00 target price is a 23x multiple on our 2010 EPS estimate of $1.50, in-line with the firm’s historical average multiple and in-line with peers."

National Oilwell Varco (NOV): This has previously been a hedge fund favorite and now Raymond James feel it will benefit throughout 2010. Their rationale: compelling valuation, free cash flow that is strong, and inorganic growth opportunities. They simply feel this is the best name in the oil service space by writing, "Our target price of $60.00 is based on ~18.5x our 2010 EPS. This valuation is in-line with its oilfield manufacturing peers and represents a more reasonable valuation for the company given its tremendous cash position, decent yield, and excellent growth prospects."

Nuance Communications (NUAN): Raymond James feels that speech recognition will be a forcible trend in technology and that Nuance is how you can play it. NUAN is already well positioned in a market that is just now entering the mainstream. Their analysts feel that, "Catalysts for the stock could include: gradual improvement in on-premise enterprise sales and resurgence in enterprise speech growth rates to 10+%, continued large on-demand wins within healthcare, potential benefits from the healthcare stimulus for Dragon Medical, continued new handset and auto wins for mobile, large hosted mobile care wins, and strong cash flow generation."

Sybase (SY): Their analytical team has decided that Sybase actually makes sense in any market environment. However, they have picked it for their 2010 list because it is a recession-resilient business and that they can capitalize on secular growth. RJ says, "Our $49 price target is based on a forward P/E multiple of 19x our 2010 EPS estimate of $2.58. We believe this is justified due to continued license growth, an improving operating margin, and the belief that we will continue to increase our EPS estimates."

TD Ameritrade (AMTD): Rounding out their list of selections, TD Ameritrade makes the cut due to possible catalysts, a solid balance sheet, as well as possible earnings growth should the Fed raise rates during the next year. RJ's analysts write, "TD Ameritrade remains at a discount to peer Charles Schwab (SCHW/$17.88/Outperform), which is currently trading at 21x our 2010 EPS estimate of $0.84 and 14x our 2011 EPS estimate of $1.29."

So there you have it. A few peculiar insertions but some logical ones as well. We'll have to see if their list can outperform the S&P500 yet again this coming year. We've also covered some other research out of Raymond James as we detail their chief investment strategist Jeff Saut's weekly market commentary. You can check out his stock market commentary from this week, as well as his previous market commentary where he feels a weak dollar will drive further market upside.

Comparing their list to the top stocks held by hedge funds, we see very little overlap. However, one stock where they both resoundingly agree is Bank of America (BAC). Tons of hedge funds hold this name and Raymond James has labeled it one of their top picks. For more favored stock picks for the year 2010, check out the top ten investment themes for 2010 as well as the most popular stocks among hedge funds.

Analysts' Best Stock Picks For 2010

*Update: This post has been removed per the request of representatives from Raymond James. Our apologies for any inconvenience. In the mean time, we highly recommend checking out the top ten investment themes for 2010 as well as the most popular stocks owned by hedge funds.

If you wanted more research out of Raymond James, we've also detailed their chief investment strategist Jeff Saut's weekly market commentary. You can check out his stock market commentary from this week, as well as his previous market commentary where he feels a weak dollar will drive further market upside.