2010: Year of EPS recovery – 2011: Year of PE recovery We expect the S&P 500 to appreciate to 1400 by 2011 yearend. The strong profits recovery in 2010 has resulted in valuations that are even more attractive now than at the start of the year. The S&P 500, at 13.2x our 2011E EPS of $93, provides headroom for PE expansion to surprise to the upside led by B.I.G. (Big-cap, International, Growth) stocks. In our view, “BIG” stocks are best positioned to benefit from strong EM led global growth and low interest rates in the US. This note highlights five “BIG” stock ideas related to our macro views.
OW Technology: play on global business spending
S&P 500 Tech trading at just 13x 2011E EPS provides an opportunity to acquire large cap growth businesses at value prices. Improving corporate profits globally and underinvestment during the recession is driving business spending growth. We think the “Tech Titans” – the top 10 earnings contributors to the S&P 500 Tech sector – are an attractive way to gain exposure.
Stock ideas: International Business Machines (IBM) and Google Inc. (GOOG)
IBM and GOOG are likely to be market share gainers in the growing categories of business IT spending on Cloud and mobile computing.
OW Energy: play on EM-led rising oil demand
BofAML commodity team expects record oil demand in 2011, led by continuing strong demand in Asia and recovering demand in DM, pushing oil temporarily to $100/bbl. Higher oil prices, despite a strong dollar vs. the euro, should increase confidence in the sustainability of high oil prices and drive the Energy PE higher. We advise owning the sector broadly with a preference for oil sensitive names. Stock idea: Occidental Petroleum Corp. (OXY) – OXY has high exposure to oil (versus natural gas) and is growing its production base.
OW Industrials: play on EM-led global growth
Industrials benefit from Asian urbanization, strong commodity prices, US exports, global infrastructure and business spending growth. EM infrastructure spend is still rising, and apart from infrastructure, Asia also has rising demand for aircraft, trucks, climate control, power generation & transmission equipment and water treatment equipment. The US exports more capital goods to Asia than Europe. Stock idea: United Technologies Corp. (UTX) – UTX end-market diversification and strong global reach makes it a poster child of our “Picks, Shovels and Wings” theme, benefitting from rising capital goods demand worldwide.
EW Cons. Discretionary: play on recovering US consumer
Consumer Discretionary sector is benefitting from rebounding consumer spending as those with jobs reopen their wallets. Many Consumer Discretionary companies are generating impressive growth from their international operations. We prefer branded consumer companies with rapidly growing exposure to EM consumers – especially in the industries of Media, Branded Apparel and Fast Food.
Stock idea: Disney (Walt) Company (DIS) – DIS is a global leader in producing branded family entertainment and is able to capitalize on a successful brand across multiple platforms and geographies.