O'Shaughnessy sees best stocks since '82

NEW YORK (Reuters) - Stocks are the most compelling since 1982 because investors have priced in a depression when the economy is only in a recession, Jim O'Shaughnessy, an influential investor on Wall Street, said on Tuesday.

Stock markets typically begin to recover in the middle of a recessionary cycle, said O'Shaughnessy, chairman and chief investment officer of O'Shaughnessy Asset Management.

"If we're in a 24-month recession, we're in the middle, and right now is when you would begin seeing the stock market recovering," he told the Reuters Investment Summit 2009 in New York.

Saying that it is a fool's errand to call a market bottom; O'Shaughnessy said he suspects that November 20, when the S&P 500 closed at 11-year lows, is the bottom of a bear market that has shed about 40 percent from the benchmark index year to date.

"Price alone would lead us to conclude that now is a fantastic time for investors with cash to move that cash into the stock market," said O'Shaughnessy, author of the best-seller "What Works on Wall Street."

Economic conditions now are not nearly as bad during the Great Depression, when unemployment was 25 percent, gross domestic product was down 30 percent, land values were cut in half and money supply contracted by 80 percent, he said.

"We're seeing none of that today," he said. "Much of the damage is out of the way."

O'Shaughnessy, whose funds have suffered a bit more than the market, said he had become bullish at the end of September when several signs told him it was time to buy.

He cited an options index known as the VIX traded above 40, three-month Treasury bills soared to 25-year highs and mutual fund withdrawals were the highest in more than 20 years.

O'Shaughnessy employs quantitative analysis with investment strategies based on culling more than five decades of price histories of some 10,000 stocks.

He said he likes the consumer discretionary sector, especially stocks that cater to consumers who are scaling back spending in the economic downturn.

Among growth stocks, his modeling has picked biotech company Amgen Inc (AMGN.O), discount retailer Dollar Tree Inc (DLTR.O) and supermarket chain Kroger Co (KR.N).

Value stocks he likes include AT&T (T.N), oil producer Royal Dutch Shell Plc (RDSa.L) and Boeing (BA.N).

O'Shaughnessy also said the retail investor, who jumped into tech stocks at the height of the bubble and then housing when it peaking, again are playing the market wrong by staying away from stocks and piling into bonds -- at the wrong moment.

Bond prices will plummet as stocks rally and the yield on 10-year U.S. Treasuries could climb as high as 4.5 percent within 12 months, O'Shaughnessy said.

"Bear markets are when stocks return to their rightful owners," he said, citing a Wall Street expression.

(Additional reporting by Jonathan Stempel; Editing by Tom Hals)