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Don Wordell: The very low inflationary environment and steady (but slower than we want) economic growth has allowed for expansion of price-to-earnings ratios. Earnings keep exceeding expectations on continued margin expansion. Our process centers on identifying stocks that have the following three characteristics: those that supply dividends, have strong fundamentals and, as a value investor, we want to invest in companies that are in the lower third of their own historical valuations. We think continued focus on these three key areas should continue to propel solid performance.
MutualFunds.com: What are some of your favorite areas in the market where you are currently finding attractive opportunities?
Don Wordell: We like Technology, Industrials and Healthcare. Technology because of the expected increase in enterprise IT spending . We favor Industrials because of the non-residential construction recovery. Healthcare is compelling because of the continued strong performance of the managed care business models.
MutualFunds.com: Do you have any concerns about the market’s overall rising price-to-earnings ratio as it pertains to your focus on finding value in the mid-cap space?
Don Wordell: Of course the value argument is harder to make today than in March of 2009. However, price-to-earnings expansion has been driven by inflation. The bad inflation (food and energy) going lower and the good inflation (wage) rising. We think this is sustainable and probably accelerates for the foreseeable future.
MutualFunds.com: With many companies in the energy space getting hit hard in recent months, do you see share prices continuing lower and at what level do you expect oil prices will find a decent floor?
Don Wordell: We feel at this point that the decline in energy capital expenditures in 2015 is well understood. Now the question is what does that do to the earnings outlook for the next two years. If earnings estimates are cut sufficiently in the January reporting season the energy stocks have probably found a floor. If managements prefer the “death by 1000 cuts” approach, 2015 could be a slog for most energy companies. We feel that the expected capital expenditure cuts will reduce production enough that the oil market should recover by 2016 and the companies that are hedged properly with strong balance sheets will weather this storm just fine.
MutualFunds.com: What are the main themes investors should pay attention to as we head into 2015?
Don Wordell: We feel that investors should keep a sharp eye on inflation. If it begins to accelerate then the PE and margin expansion we have enjoyed over the last three years could evaporate. Another theme we see is that while fundamentals get a stock from point A to point B, there always seems to be a lot of noise along the way. It seems like the market can bounce from one macro fire to the next (Ukraine, Ebola, ISIS, etc.) and lose track that fundamentals are still good. Investors should do their best to ignore the noise and stay focused on fundamentals.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.
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