Savvy Investment Ideas: Time to buy 'Mid-Cap Marvels?'
Broad-based market gains sending all 10 S&P 500 sectors rallying into the close for the second straight session -- so is it time to hit a sell button on what looks like an overextended stock market?
Delphi Management Founder and President Scott Black continues to be constructive on the U.S. equity market despite a seemingly expensive valuation. “We put the market at about 16.8 times earnings,” he told FBN in an interview, “which is expensive by historical norms but still nowhere near the levels of the 2000’s tech bubble.”
Still, Black doesn’t foresee a double-digit blowout in the stock market that investors saw in 2014. Instead, Black -- who is a member of the 2015 Barron’s Roundtable -- expects an 8-10% return on the S&P 500 by year-end. “The 10-year interest rate is so low around 1.5%, and obviously Europe is in a doldrums, and China is decelerating,” he told FBN’s Liz Claman, adding that “the United States is the best of the large global economies, and I think it’s a rational expectation to think that overall stocks will do well in the United States.”
Looking at the markets’ performance so far this year, this week’s back-to-back gains have lifted the three major U.S. averages within 1% of being break-even but still firmly in the red for the year. The S&P MidCap 400 Index is the only major index that’s in positive territory in 2015 -- this is after trailing the S&P 500 for most of last year with an 8.2% annualized return.
“If you look at small and mid-cap stocks as a whole, they underperformed systematically last year and they’re still relatively expensive,” Black said. Still, the bottom-up stock picker with more than 40 years of investment experience sees opportunity in two Silicon Valley mid-caps that are poised to do well going forward.
Lam Research Corporation (NASDAQ:LRCX) is a $12.2 billion market cap manufacturer of semiconductor processing equipment used in the fabrication of integrated circuits. The stock is up more than 50% over the past year with a forward P/E ratio of 12 times expected earnings. “This is a leader in the space that’s doing well across all of its businesses,” Black, who also expects Lam Research to post a solid earnings growth going forward, said.
Black’s second pick, SYNNEX Corporation (NYSE:SNX) is a leading business process services company headquartered in Fremont, California. With nearly $3 billion in market capitalization, SYNNEX stock is up more than 40% year-over-year with an 11 times multiple on this year’s earnings.
When it comes to spotting attractive opportunities in the market, Black uses a bottom-up approach, which typically overlooks broad sector and economic conditions and instead focuses on individual stock selection based on fundamental analysis.
“We look for companies that can run over 15% on book with strong cash flows on the balance sheets, and that typically sell under a 13 multiple," he said.
Black adds that by buying stocks with a multiple that’s below the market’s current level of roughly 17 times expected earnings, investors can build in a margin of safety for their portfolios: “The idea is not to trade a piece of paper but to buy a business that has good characteristics.”
The one sector that the Delphi Management chief is not keen on is energy. In fact, Black has completely sold out of oil and currently has a zero percent weighting on his Barron's Roundtable pick last year -- Bonanza Creek Energy (NYSE:BCEI).
“If you look at the data, there’s 93 million barrels a day of production, depending on seasonality in the United States,” Black said. “The overall demand is somewhere between 91.5 and 92 million barrels a day, and the Saudi’s aren’t going to play ball, so I think that the price of oil will stay low for a while.”
Crude oil settled on Tuesday settled 7.02% higher at $53.05 per barrel, its highest level since Dec. 31.