Monday Morning: When opportunity knocks… buy, buy, buy

Investors are generally seeking to buy low and sell high, but few actually do so on a consistent basis.

The reason, according to Mary Lisanti, chief investment officer for domestic equities at ING Pilgrim Investments in Scottsdale, Ariz., is that to do so successfully, investors have to buck their emotions. The investor has to buy when a stock, or the stock market, is down.

That’s very difficult to do because when the stock market is down, economic prospects look gloomy, corporate earnings are generally weak, and the moods of investors are also low. The investor has to buy when the future for most companies, most stocks, looks bleak.

It’s much easier to buy when the market is rising, because you feel good when you buy a stock, and its price immediately rises, Ms. Lisanti said last month. You feel justified. You feel smart.

But it the investors who can fight their emotions and buy when the future looks bleak are most successful. Ms. Lisanti pointed to the success of investors who bought IBM or Citibank stock in the early 1980s. Many people thought IBM was going to go out of business, she said. Citibank almost did.

But some investors bought when those stocks were on their knees, and they reaped rich rewards when the companies turned around, and the stocks soared.

Ms. Lisanti expressed the belief that stocks in general currently are cheap based on consensus 2002 earnings forecasts, and now that the market has made it past the end of June, investors will begin to look to 2002 and see that.

ready to pop

While the consensus for the increase in corporate earnings is between 10% and 15%, Ms. Lisanti said, ING Pilgrim believes it is likely to be closer to 20%.

That is because companies already have trimmed their inventories heavily, and they have cut costs dramatically.

When the economy begins to recover, and sales begin to recover, profits should surge. So in Ms. Lisanti’s view, the stock market is ready to pop.

Is there any confirming evidence that Ms. Lisanti might be right? What evidence is there that the economy is about to bounce off the bottom?

an optimist

Paul Kasriel, economist at Northern Trust Co. in Chicago, thinks it will. His evidence is the growth of one measure of the money supply, M2 adjusted for inflation, or “real” M2.

(M2 is currency, traveler’s checks, time deposits, savings accounts at banks and thrifts, money market accounts, small time deposits and retail money market mutual funds).

M2 grew at an annualized rate of 10.6% in the three months ended April 30, up from a low of 3.1% in July last year.

Except for November 1998, that is the strongest growth rate since the mid-1980s.

So what? So Mr. Kasriel’s research shows that there is a high correlation between real M2 growth and real final sales to domestic purchasers two quarters later. And, in fact, the correlation has increased in recent years.

His conclusion: “Historical relationships and recent real M2 growth point to some kind of strengthening in aggregate demand in the second half of the year. And … because excess inventories are being worked off aggressively, an increase in aggregate demand should result in increased production.”

So putting Ms. Lisanti’s and Mr. Kasriel’s views together, it seems that now might be a good time to increase equity exposure.

If they’re right, the economy has bottomed, and we should soon see demand and revenues pick up. And given the cost cutting that has occurred, that means earnings should soon follow.

It’s generally better to be too early than too late when the market accelerates, because the biggest gains usually occur in the first few months.

Mike Clowes is the editorial director of InvestmentNews.

Related Topics: Just Thinking