Subodh Kumar, chief investment strategist at CIBC World Markets Inc., has switched his emphasis to shiny new growth stocks from the grimy old energy producers and utilities that offered good value in the past couple of years.
"This shift is likely crucial -- more so than the recent focus on large-cap outperformance," Mr. Kumar said in a note to clients last week, as he lamented Wall Street's obsession with big names.
Mr. Kumar thinks the time is right for information technology, telecommunications, health care, and other expanding sectors following the domination -- pretty much since 2000 -- of value names.
Among those groups, Mr. Kumar favours communications. He says the positive earnings surprises from info tech have been particularly overlooked by the market.
For 2006, he calculates fair value for the Standard & Poor's 500-stock index at 1,300, but thinks the index will eventually climb above that if investors push prices too high, as they usually do at the end of a cycle.
For now, Mr. Kumar thinks the global outlook is good as inflation remains contained. Meanwhile, expansion in emerging Asia, and recovery in Japan and Europe appear to be set to offset a moderation in U.S. growth.
Mr. Kumar thinks that Wall Street's expectations for double-digit bottoms-up corporate earnings growth in 2006 is "frothy." He thinks single-digit growth is more realistic. In 2007, he is expecting zero growth.
Because some estimates may be trimmed, the strategist believes the emphasis on "good-quality" profits is particularly important. Good quality, in his opinion, comes from companies that can defend their market share with a well-carved niche or a strong product.
Mr. Kumar has already seen this trend in action: Looking at results from the fourth quarter of 2005, industrial companies delivered profit expansion of 8.4 per cent compared with the same quarter a year earlier. As of the end of December, analysts had been expecting 12.4-per-cent gains. By contrast, information technology companies he studied posted jumps of 23.9 per cent, compared with Wall Street's call for 13 per cent.
"The sweet spot of quality delivery and style change is likely in quality growth, and we see communications as being in a new cycle and as underappreciated."
Communications includes media, info tech and delivery.
The strategist currently has an "overweight" on info tech, with a 19-per-cent weighting versus its 15.1-per-cent weighting in the S&P 500. Mr. Kumar thinks consumers are drawn to communications devices such as satellite radio, entertainment gadgets and multifeature phones for their fashion and convenience. Emerging Asian markets are more price sensitive while developed countries are more fashion conscious, he says, and both could drive a new cycle in hardware and software.
© The Globe and Mail
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