After the S&P 500 hit 43 closing records this year, the stock market is full of questions.
Will the rally continue? Is a correction coming soon? What is the outlook for small-cap stocks vs. large-cap stocks? What is the outlook for growth stocks versus value stocks?
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To answer these questions, we turned to veteran market strategist Robert Doll, as part of our expert interview series.
He is now CEO and chief investment officer of Crossmark Global Investments, which had $6.8 billion in assets as of June 30. Doll was previously chief equity strategist at Nuveen and BlackRock.
We also look at some of his favorite stock picks. This is what he had to say.
Crossmark Global Investments
TheStreet.com: What is your outlook for the stock market over the next year?
Doll: We are in a momentum-driven bull market. Predicting the end is a fool's game: impossible. At these levels, with expensive valuations, bulls assume a soft economic landing, inflation under control, that the labor market and consumers are doing well, and that earnings growth is good.
Bears say the economy is weakening and earnings estimates are too high. They say consumption is slowing, as evidenced by falling confidence and rising debt. They point out that the world is a disaster. With valuations this high, things had better be close to perfect (for the stock to rise), they say.
I am cautious, although I am not a bear.
TheStreet.com: Do you expect a 10% correction for the stock market soon?
Doll: On average, corrections of that size occur once a year. Something has to go wrong, like a rough landing – not a recession – instead of a soft landing. Or oil prices go up. We could get a 10% correction in the coming months.
TheStreet.com: What do you think about large-cap stocks vs. small-caps and growth vs. value?
Doll: Small cap companies tend not to do well in economic downturns or recessions. The anticipation of a slowdown makes me cautious about small caps. But small-cap stocks are priced much lower than large-cap stocks, so they should do well when the economy emerges from its weakness.
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We have growth and value stocks. But to value I don't just want cheap stocks: they have to have something to do. We want growth stocks for when the economy slows down. Growth works better than value in a slowing economy. Over the next 12 months, I think the value will improve.
TheStreet.com: Is there a particular industry that you like?
Doll: We like financial stocks because they are cheap relative to their track record. Their balance sheets are in better shape than usual during this part of the cycle. This is because loans have left the banks.
In general, it is now less about sectors and more about factors. (Important factors include) high, predictable profits and good, and preferably improving, cash flow. In a way that describes the quality. Those stocks have done well.
If there is a period of neglect due to a weak economy, those themes will perform better. You can find stocks like that in any sector.
Our Steward Large Cap Core Fund (SJCAX) It has a price-to-free cash ratio of 13 versus 22 for the Russell 1000. And the fund's return on equity is 24 versus 22 for the index.
Those ratios are good measures of which portfolios will perform in times of uncertainty.
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TheStreet.com: Can you talk about three of your favorite stocks?
Doll:
1. Cigna (IC) the health insurer/pharmacy benefits manager. Its price-earnings ratio is at a discount of more than 30% compared to the market. Its long-term earnings and dividends have prospects for 10% annual growth.
It has excellent fundamentals at a cheaper price. Many healthcare stocks are not doing well near the election due to potential healthcare legislation. But Cigna has no exposure to Medicaid and only a small Medicare program.
The main risk for Cigna is that its cost-to-income ratio is slowly increasing.
The fund manager buys and sells:
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- Top Fund Manager Says Alphabet Is a Great Value Stock
2. American Express (AXP) the credit card company. It's growing. As membership and usage increase, net interest income also increases. It has a richer customer base than its competitors.
Therefore, you should face fewer problems in an economic downturn. It is selling at a (high) valuation of 20 times earnings. So you hold your nose and shop.
3. Lowe's (LOW) the second largest home improvement company after Home Depot (HD) . There is a big gap in profitability and returns between the two, with Lowe's trailing behind.
But Lowe's is closing the profit gap. You are improving inventory and operational controls. And its financials reflect that: it has made good profits.
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