At RBC Dain Rauscher, our goal is to provide our clients with timely and insightful information
that will help them make wise investment decisions. To this end, we offer the following commentary and statistics.
Locked On Risk
"Remember that stocks always look worst at the bottom of a bear market (when an air of
gloom prevails) and always looks best at the top of a bull market (when everybody is
optimistic)." Claude Rosenberg, Stock Market Primer, 1981.
Rosenberg, a widely respected San Francisco, California, money manager followed that
quote with this advice: "Have strength and buy when things do look bleak and sell when they
look too good to be true." Bleak indeed! The February 24 Wall Street Journal column
focused on the fact that with the current threat of war, a weak economy and the threat of
terrorism many money managers are left with "little stomach for the business." Also,
consider the late February 57.8% bearish consensus reading from the American Association
of Individual Investors; that's up from a 38.1% reading the prior week. Both professional and
individual investors now appear certain that no good can come from current levels of
uncertainty.
For an important historical perspective, pessimists might learn something of value in the
recent Ibbotson Associates data confirming the worst 10-year period for the S&P 500 as the
one ending in 1938. For that decade the market declined at a rate of 0.9% annually. After
three down years to start the decade, the S&P 500 will have to gain by Ibbotson calculations
5.7% annually for the next seven years to be as bad a decade as the one ending in 1938.
In our January and February commentaries, the focus was on the positive factors that we
think actually exist today and the important role positive surprise has held in shaping the
longer-term return of stocks. This month, rather than join the "sky is falling chorus," we
wonder which stocks the intrepid investor Rosenberg might consider for purchase. We know
that the normal premium valuation of the shares of many of the highest quality industry
leading companies have fallen to more pedestrian, in some cases historically cheap levels. A
recent research report by Standard and Poors refines the evidence supporting ownership of
high-quality companies. The report is timely because it provides strong evidence that "this
time it is not different" and like the past, buying and holding premium quality companies is
likely to be a winning strategy. The powerful conclusion to be drawn from the study is that
the highest quality companies not only meaningfully outperform the market, but do so at
lower risk to the investor. The report, which confirms comparable results back to 1956, tracks
stocks rated A+ (the highest rating and proprietary to S&P) from 1986 to 2002 and finds that
those stocks compounded at 12.3% annually vs. 10.8% for the S&P 500. An all A rated (A+,
A, A- by S&P) list beat all B-rated issues by a wide 2.4% margin. Prime Opportunity List
stocks currently rated A+ by S&P include Pfizer, Merck, Home Depot, Wal-Mart, General
Electric, MBNA Corp., Citigroup, and Automatic Data Processing.
Phil Dow
Director of Equity Strategy
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST
