| NEW YORK
NEW YORK Feb 6 With the U.S. stock market
nearing record highs, portfolio managers are preparing for a
Some are shorting the broad Standard & Poor's 500 index and
putting money into Japanese equities instead. Others are selling
stocks that haven't rallied yet, based on the theory that the
momentum for these stocks must be broken. And others are buying
companies like Coach Inc, whose recent quarterly
earnings results came in below analyst expectations, as
long-term value plays.
It's an about-face for many fund managers, who have spent
the last few years explaining their bullishness to clients who
were skeptical about the stock market. Yet with the tide in
sentiment appearing to shift, some fund managers say that now is
the time to become contrarian. Early evidence of that shift in
sentiment includes the $12.7 billion in new dollars invested in
stock funds in January, the largest four-week flow since 1996,
and a nearly two-year high in the American Association of
Individual Investors weekly bullishness survey.
"We think we're heading for a correction that could well
wipe out the gains we've had this year. We're in a stage of
euphoria and it's not a healthy thing in the end," said Barry
James, who oversees five portfolios as the head of James
Advantage Funds, which is based in Alpha, Ohio.
Here are some of the strategies of fund managers who are
skeptical of the broad market rally.
The Dow Jones industrial average closed at 13,986.52
Wednesday, just 1.3 percent below its nominal high of 14,164
that it reached in October, 2007. The S&P 500, meanwhile, closed
at 1,512.12, or 3.4 percent below the high it closed at in 2007.
Both indexes have gained 6 percent or more since the start
of 2013, thanks to a combination of seasonal inflows into
stocks, a corporate earnings season in which 69 percent of
companies have beaten expectations and signs that Europe's debt
problems are improving.
That quick start to the year is turning some money managers
"The market has run far and fast, which by definition means
that you're vulnerable in the short term," said Seth Reicher,
president of San Francisco-based Snyder Capital Management.
Reicher isn't entirely abandoning the stock market, which he
considers a better alternative than low-yielding bonds. But he
is staying away from sectors he considers "extraordinarily
expensive" such as real estate investment trusts and utility
companies. Instead, he is focusing on companies with very high
cash flows but that do not pay a dividend, which he believes
make them more likely to grow earnings.
He's been adding to his position in Clean Harbors Inc.
, which has a dominant position in the North American
market for hazardous waste disposal, and is expected to increase
its free cash flow by 21.4 percent in 2013. The company's shares
are down 3.6 percent for the year through Wednesday, and trade
at a price-to-earnings ratio of 26.7.
Brian Singer, a portfolio manager of the $66.2 million
William Blair Macro Allocation Fund, recently began
shorting the broad U.S. market by buying out of the money puts
that expire in mid-April and increased his positions in Japanese
equities and Spanish and Italian stocks.
His reasoning: continued political brinkmanship in
Washington over scheduled spending cuts scheduled to take effect
March 1 will lead to another high-stakes standoff. If the cuts,
dubbed the "sequester," go forward as scheduled, federal
spending would be cut by about $85 billion for one year, and
would fall by $1.2 trillion through 2022.
Other portfolio managers are searching for overlooked value
Marian Kessler, a portfolio manager of the $169 million
Becker Value Equity fund, said that the market's rally
is making it "tougher to find new ideas" that have the potential
to outperform. Lately, she's been putting more money into retail
She recently began buying Coach after shares fell nearly 16
percent after the company missed analyst expectations and said
it would move further away from its baseline handbag market and
into the shoes and clothing segments. But Kessler, who believes
that the company's share price drops were due in part to selling
by growth fund managers, is attracted to the company's strong
cash flow and yield of 2.4 percent, she said.
James, the Ohio fund manager, has been selling some of his
past winners like Family Dollar and Dollar Tree
, as well as stocks that have underperformed in the
recent rally like Southwest Gas Corp., which is up 3.9
percent over the last three months, compared with a 5.7 percent
jump in the S&P 500. That underperformance suggests that the
stock's gains will be limited by poor momentum, he said.
Instead, he's been buying companies like Ford Motor Corp.
and furniture maker Steelcase Inc. that will
benefit from the improving jobs market. Yet he's also expecting
the market to peak soon, so he is increasing his level of cash,
"A market peak is next to impossible to call," he said.
"We're taking steps to lower our equity exposure but we'll ride
this rally as long as we can."