10.24.2011
By Terry Flanagan

Stock Values Capped

In the era of “volatility and confusion,” one asset manager states that strong company performance is masked by overall slow economic growth.

Eagle Asset Management, a traditional buy side asset manager with more than 17 billion under its equity and fixed income platforms, predicts “volatility and confusion,” ahead for the near term.

“In a market filled with such negative sentiment and fear-selling, investors generally sought refuge in larger companies with higher historical growth rates, lower debt, higher dividend yields and lower beta,” noted Ed Cowart, the firm’s portfolio co-manager of equity income and value strategies

Yet, although fundamentally growth companies reported gains, investors flocked to stable companies with proven records, superior balance sheets and high dividends.

“The market was clearly in ‘prove it’ mode during this period of uncertainty,” Cowart said.

Within the firm’s consumer discretionary sector, Cowart noted that fast-food staple, McDonalds, was a very strong performer with mid-single-digit positive performance despite the market sell-off. The firm played a sinking financials sector by using REITS (real estate investment trusts), and spotting positive selection in commercial banks and diversified financial services.

“We traded down,” said Cowart. “Our portfolios captured less of the downside, but we expect that in such an environment.”

The firm’s stock selection in the energy, financials and consumer discretionary sectors all stood out as very strong positive influences on relative performance; but a lack of allocation toward the technology sector was the strongest detractor to relative performance during the third quarter, noted Cowart.

“More than $2 trillion in cash sits on corporate balance sheets,” Cowart noted. “Housing prices seem to have made a bottom, and corporate profits as a percent of GDP are at a new high. Despite this good news, continuing economic sluggishness as well as political and fiscal challenges will keep a short-term lid on stock values.”

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