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Portfolio Strategy
Bull Market, Chapter Two
Ken Fisher, 03.25.10, 08:40 PM EDT
Forbes Magazine dated April 12, 2010
I like what I see: improving fundamentals plus skepticism: the classic ingredients of the second phase of bull markets.
More From Ken Fisher

It's a year since the bull market began, and I remain firmly bullish. I'm often wrongly called a permabull. I'm not one. In 25 years of FORBES columns I turned bearish for three extended periods: in 1987, in 1990 and between 2000 and 2002. Yes, I completely missed foreseeing the 2008 bear market. But that doesn't make me a permabull.

When in doubt I am biased toward owning stocks. Stocks rise more often than not. Since bear markets are always followed by bull markets--which is a basic rule some investors seem unable to accept--it seemed to me basic to be bullish once the 2008 bear market was well under way. One year into the current bull market I like what I see: globally improving fundamentals plus strong societal skepticism. Snarky, cranky sentiment and better fundamentals are the classic ingredients of the second phase of bull markets.
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Economic numbers globally and almost consistently keep coming in up and better than expected, while being largely dismissed in terms of significance. In part this is because the fastest recoveries from the recession are happening in the 25% of global GDP found in emerging markets countries. Maybe it's unnerving that China and Brazil are leading us. Americans are way too U.S.-focused.

My Feb. 8 column cited the "pessimism of disbelief," the tendency to see all news as bad, or, if good, as something likely to morph into something bad. (Typical formulation: Stimulus efforts either won't work or will cause inflation.) You can see this pessimism in mutual fund flows: For three years there has been a migration into bond funds--mostly into government bonds for safety--just in time for long-term U.S. government bond funds to return a --17.5% in 2009. That's fear.

For more on market sentiment, visit market blogs anywhere. The skepticism is wise-guy thick. Anyone posts something positive and they get pounded by the wiseacres. I love it. This is the wall of worry bull markets classically climb. So be bullish while the sentiment's sour--and keep buying good companies at reasonable prices, like these:

Brazil's Fibria Celulose (FBR, 22), the old Votorantim Cellulose, at first glance seems neither cheap nor positioned to dominate. But it's about to merge with Brazil's Aracruz to become the global leader in hardwood pulp, with 24% of the market. This is the raw ingredient for high-end paper and ultrasoft tissue. The merger implies future pricing power in a market where prices are already firming as inventories shrink. Fibria sells at 20 times projected 2010 earnings and at 90% of book value. Not very cheap. But I'll bet that price will turn out to be 8 times 2011 earnings.

Coal is China's energy source. I recommended Yanzhou Coal Mining (YZC, 22) in the July 13 column at 12. It still has upside. With great reserves in advantageous locations, this low-cost 35-million-ton-per-year (and growing) producer should enjoy fatter profits margins over the next several years. It sells at 14 times likely 2010 earnings.

Today Big Brother should be watching. Israel's Nice-Systems (NICE, 31) makes voice loggers that record, archive and monitor communications from multiple sources. These complex systems can detect changes in emotion among voices and are sold to 24,000 customers ranging from multinationals to Australia's Parliament to police and fire departments. For a steady grower this company is too cheap at 17 times 2010 earnings and 1.8 times book value.

New Zealand will prosper in part on its proximity to emerging markets. This prosperity will rub off on the dominant phone company, Telecom New Zealand (NZT, 7), which is too cheap at ten times 2010 earnings and 80% of annual revenue. You're likely to get an 8% dividend yield over the next year on today's price.

Weight Watchers (WTW, 25) runs weight-loss cheerleading sessions and licenses its name to vendors of moderate-calorie prepared foods. Is it hard to envision why the stock should rise and folks should shrink their wallets to diet now? Just see it as a classic long-term, moderate-growth consumer stock--just when stocks of expensive brand-name products are doing well. It is, after all, the brand in its field. As consumer income bounces back, people don't have to choose between this and indulgences: They might choose both. Weight loss makes them feel better about indulging. This stock was for a very long time steadily over $35 and often up to $45. It will get back there. At today's price it goes for nine times likely 2010 earnings and yields 2.8%.

Money manager Ken Fisher's latest book is How to Smell a Rat: The Five Signs of Financial Fraud (John Wiley, 2009). Visit his homepage at www.forbes.com/fisher.

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