In the midst of a spring stock market surge sweeping some spots on the global map—notably the US—some investors have been left scratching their heads, wondering just what it is that the equity market is celebrating. True, the US economy has been improving in some areas, but is it enough to justify the hoopla—and keep the market from back-sliding at the first hint of trouble? And, are there any values to be had in this environment? Peter Langerman, chairman, president and chief executive officer of Mutual Series® and co-portfolio manager ofMutual Shares FundandMutual Global Discovery Fund, believes much of today’s US market euphoria is actually rational because it’s based on improving fundamentals, and yes, there are values to be had.
You might think the rising stock market has posed a challenge for the Mutual Series’ deep-value strategy, because bargains can be harder to find as valuations climb. But, because his team takes a bottom-up approach, Langerman says “there are always opportunities,” particularly in underappreciated companies with good fundamentals and long-term potential.
Has Apple Lost its Sheen?
One stock that has fallen out of favor over the past couple of months is Cupertino, Calif.-based Apple Inc. Once the belle of the technology ball, Apple’s stock price fell from more than $700 a share in September 2012 to just under $400 a share in April. While admitting that Apple has economic and competitive hurdles, Langerman says the company is an example of a value play that fits their approach, as it’s a recent top-10 holding in some Mutual Series funds.1
“The competitive threats are a bit more evident, but they are not really different than they have been. The ability of the company to charge premium pricing certainly is under question now. It’s also a matter of the pendulum swinging from perhaps undue optimism last year to a bit more undue pessimism [this year]. Apple has economic challenges and fundamental challenges, we know that, but it hasn’t totally lost its ability to innovate. And, the recent headlines concerning its tax policies are more headline risks than fundamental game-changers, in our view.”
Langerman reminds investors that Apple’s huge cash reserves, totaling more than $140 billion as of April 2013, are something not to lose sight of. Apple has begun returning some of its cash stockpile to shareholders as dividends, so it has become a “much more reasonable risk/reward proposition ” in his view. Still, some observers were puzzled by his team’s seemingly sudden interest in Apple. Langerman explains:
“It’s funny. We got a fair bit of attention when we didn’t own it, and now we’re getting some attention because we do own it. For us, there is usually a price that we would be interested in buying something. We didn’t own Apple through the big run-up last year, and we got a bunch of questions along the lines of, ‘Why not own it? It’s in the benchmark, it’s big.’ We always thought it was a well-run company, performing too well, in a sense, for us as value investors to find it an interesting value proposition. But, things changed around the end of last year and the beginning of this year. At this point, we are comfortable with owning the stock, and we’d rather be buyers in the face of what seems like bad news than buyers when everybody loves it and it’s on the upswing.”
Rational vs. Irrational Exuberance
In a low-interest rate environment with signs of improvement in the US economy, many investors have mustered the confidence to move their money into—or back into—stocks this year. US unemployment has continued to decline this year and home sales have climbed, boosting consumer confidence.
That said, the US economy isn’t firing on all cylinders and still faces an uphill debt battle and a dysfunctional Congress, inspiring naysayers to resurrect former US Federal Reserve Chairman Alan Greenspan’s infamous term “irrational exuberance” to describe current market conditions. Langerman’s take?
“I don’t think we are quite at ‘irrational exuberance’ levels. At the same time, we have had a tremendous and dramatic move in the short term. It does, on certain days, feel like people are reaching a bit. We’ve all heard talk about a lot of cash on the sidelines, but at the same time, people are worried about being left behind. I’d say valuations have moved up, generally, but I don’t think we are quite in an extreme danger zone.”
Some investors may still have unpleasant memories of the 2007 market peak, worrying that they’re too late to the party and that the market has nowhere to go but down. You can’t blame investors for being skittish, but Langerman doesn’t buy into a doomsday scenario, explaining that the near- to intermediate-term risks that could potentially lead the economy to fall off a cliff “seem to be off the table.”
“The notion that we are going to wake up to the apocalypse is much less likely now.Things have improved, although you can never say never. We have always been of the belief that you can’t time markets. Are we going to see a correction in the near term? It’s possible, but I think the fundamentals are such that if you’re prudent and you’re not trying to time the markets, it’s certainly not an unreasonable time to consider increasing your exposure if you have been reluctant to be in the equity markets.”
Despite the uncertainty, Langerman says he and his team are “not sitting on our hands,” and they are actively looking for opportunities within and outside the US.
Some investors may still have unpleasant memories of the 2007 market peak, worrying that they’re too late to the party and that the market has nowhere to go but down. You can’t blame investors for being skittish, but Langerman doesn’t buy into a doomsday scenario, explaining that the near- to intermediate-term risks that could potentially lead the economy to fall off a cliff “seem to be off the table.”
“The notion that we are going to wake up to the apocalypse is much less likely now.Things have improved, although you can never say never. We have always been of the belief that you can’t time markets. Are we going to see a correction in the near term? It’s possible, but I think the fundamentals are such that if you’re prudent and you’re not trying to time the markets, it’s certainly not an unreasonable time to consider increasing your exposure if you have been reluctant to be in the equity markets.”
Despite the uncertainty, Langerman says he and his team are “not sitting on our hands,” and they are actively looking for opportunities within and outside the US.
“First and foremost in our minds are compelling valuations. So we have things to do, but you just have to be a little bit careful and cautious these days.”
Prudent exuberance, anyone?
1.As of 4/30/13, Apple Inc. (AAPL) common stock represented 2.08% of total net assets of Mutual Quest Fund, 1.91% of Mutual Shares Fund, and 1.88% of Mutual Global Discovery Fund. Holdings subject to change.
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