M.D. Sass sees S&P up 13 percent in next year

Martin Sass, Chairman and Chief Executive Officer of M.D. Sass, speaks at the Reuters Investment Outlook Summit in New York December 7, 2009.

NEW YORK (Reuters) - Stocks, even after a 65 percent rally from their March bottom, still have room to run higher, perhaps as much as another 13 percent, said veteran asset manager Martin Sass on Monday.

"We are looking at a very big increase, 45 percent or so, in S&P 500 earnings for 2010 versus 2009, to about $75 per share, up from $52 a share last year," Sass, the founder of investment advisory firm M.D. Sass, said at the Reuters Investment Outlook Summit in New York.

"We are looking at another significant gain in corporate profits in 2011 to about $92 a share," he said.

"And if you put multiple of 13.5 times on that $92 you get 1,250 on the S&P, which is about 13 percent upside over the next 12 months for the overall market from current levels, which we think is a reasonable expectation."

Sass's firm has about $6.5 billion in assets under management spread across roughly a dozen different investment portfolios and a team of 120 people in New York.

In an interview last March with Reuters, Sass said he thought U.S. stocks were undervalued, saying the rally would start from a point of "maximum pessimism."

Sass said his view that the S&P 500 has another 150 or so points to move higher is predicated upon the belief that the global economy has started a synchronized recovery.

"On a valuation basis we still see the market as being moderately undervalued, based on our expectations of earnings, dividends and the prevailing interest rate outlook," he said.

As the economic recovery takes hold, Sass said increased demand for oil will boost prices to around $80 a barrel next year, but a spike above $100 a barrel won't occur until 2011.

Sass's firm is invested in oil drilling, especially off-shore drillers and related companies such as Cameron International Corp (CAM.N), Halliburton Co (HAL.N), Baker Hughes Inc (BHI.N), Transocean Ltd (RIG.N), Schlumberger Ltd (SLB.N).

"The reason I see a spike coming in 2011 is as the economy expands and the demand for oil keeps going up, supply is not increasing," Sass said.

"Even though more money is going into drilling budgets to drill for more oil the large fields are depleting at a rapid rate so you don't have a net increase in the supply," he said.

With an increase in economic output, Sass said he expects benchmark 10-year U.S. interest rates to rise into the 4 percent range next year with 2011 seeing rates above 5 percent.

"Once real GDP growth grows at 4-plus the Fed will start to tighten again and inflationary pressures are going to start to return. But I think that is a while off yet. I mean I think we are at the 2-1/2, 3-1/2 percent range here for a while."

(Additional reporting by Manuela Badawy; Editing by Leslie Adler)