The Great Story of 2010 — Go Big or Go Home

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

The ratings upgrades currently taking place in the large-cap sector of the stock market make a telling predictor for the rest of the year. Wall Street is getting ratings happy and this is a good development.

The new “buy” or “outperform” ratings aren’t just in any one particular market sector; the renewed enthusiasm is broad-based across a number of industries. For example, Intel just got upgraded to an “outperform” rating by a major firm based on an expected rebound in corporate PC spending. Boeing was just upgraded to a “buy.” So were EMC Corporation, Morgan Stanley, UnitedHealth Group, Waste Management, PNC Financial Service Group, Wynn Resorts and Tiffany & Company, to name just a few. Wall Street is upgrading a diverse range of stocks in anticipation of better earnings and this is going to be the big story this year. In 2010, large-cap companies will equal larger-than-last-year earnings. I’ll buy that for a dollar.

Of course, a lot of us thought that’s why the stock market went up so much in 2009. It was all about better earnings to come. Maybe, though, the market’s strength was only about recovery from the bottom. Perhaps it was the opposite reaction to the market’s crisis of confidence.

Wall Street’s new penchant for upgrading large-cap companies is based on reasonable expectations and I think it’s a very positive development for the stock market on a near-term basis. No matter how dull the word “dividend” sounds, it’s a very important part of your total returns. Long-term, however, there remain big hurdles for the private economy and, frankly, also for the government economy. We’ve got to get our fiscal house in order for the long-run health of the economy. This applies both to government and to individuals.

Longer-term investors will know that the stock market hasn’t yet recovered from its height set in 2000. Without dividends over the last 10 years, a passive investor’s returns would be negative.

So, we still have a long way to go. Right now, institutional investors are buying, because they have money to invest and nowhere else to invest it. The strategy is: there is hope on the earnings front, so why not pour it into stocks while interest rates are low?

If I was to create a new investment portfolio of stocks for myself right now, I’d probably invest in an established gold producer, a large-cap national bank with a solid foundation, one or two large-cap technology stocks that deal with corporate customers, a consumer goods company, a fertilizer company, and an oil/gas pipeline. All would have to pay dividends. I’d also want to own the market through an exchange-traded fund (ETF) and I would also invest in some sort of commodities index or basket. For speculating, I’d stick with a small basket of U.S.-listed Chinese stocks.

If a bunch of new cash parked itself in my investment account, I would be a buyer of stocks right now. It is, after all, the stock market’s last hurrah. I don’t know what’s going to happen to the stock market over the next couple of years or this new decade. With experience, you learn that anything is possible. I do believe, however, that with new money to invest in stocks, the vast majority of it should go big or stay home.