NEW YORK (Reuters) - The U.S. economy will cool in 2007 but stocks will still post about a 10 percent return, especially the largest companies, a portfolio manager with Schafer Cullen Capital Management said on Wednesday.
Earnings growth next year for the benchmark Standard & Poor's 500 Index .SPX will only be about 4 percent to 5 percent, or about half the market's consensus of 9 percent, money manager John Gould told the Reuters Investment Outlook 2007 Summit in New York.
But an increase in forward price-to-earnings ratios to about 17.5 to 18 for the S&P 500, up from 15.9 as of November 30, will lead to the overall double-digit gain in stock prices, Gould said.
"The combination of 4.5 percent earnings growth and some multiple expansion gets you to about a 10 percent rate of return," he said.
"Where we see value in the market place is not only in the large cap area, but actually in the mega cap area of the market," he said.
There are about 50 U.S. companies that meet Gould's criteria for mega caps -- companies with a market value of $50 billion or more.
Gould likes dividend-paying stocks and believes the largest capitalized stocks will provide the greatest return in S&P 500 stocks because they will have the best dividend yield. Dividends have historically accounted for about half of total return to shareholders, he said.
Gould has selected a portfolio of stocks, such as Bank of America Corp. (BAC.N: Quote, Profile, Research, Stock Buzz) and Anglo-Dutch consumer goods group Unilever Plc (ULVR.L: Quote, Profile, Research, Stock Buzz), whose dividend yield averages about 4.1 percent, or slightly less than the yield on a 10-year bond.
"We focus on low valuation, high dividend yield and the ability to grow dividends going forward," he said. Continued...
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