Wasatch Chairman Sam Stewart Is Nervously Bullish

(PRWEB) October 08, 2012

Wasatch Advisors today released Chairman Sam Stewarts third quarter 2012 insights on the economy and the stock market.

Stewart notes that his outlook has evolved over the past few years. Shortly after the 2009 market lows, he was bullish regarding the investment potential for stocks when overall stock valuations were compelling and investors were fearful. As the market rallied since 2009, his optimism waned. He moved first from bullish to cautiously bullish. Now he considers himself nervously bullish.

Said Stewart as he raised the caution flag even higher from last quarter, There are three main reasons for concern: (1) most stocks have become more expensive; (2) the current actions of the U.S. Federal Reserve arent likely to improve economic conditions in the short term and pose an inflationary threat in the long term; and (3) Im disappointed by our politicians continued refusal to work together to deal with our most critical challenges.

While Stewart is less bullish on the overall stock market, he still believes its a stock pickers environment where Wasatch can continue to uncover some of the Worlds Best Growth Companies that have the potential to outperform the overall economy. Said Stewart, At Wasatch, our portfolio managers are always looking for healthy, innovative and well-managed companies that are growing much faster than the overall economywe just have to find them and buy them at the right price.

Comments from Sam Stewart, Chief Investment Officer and Chairman, Wasatch Advisors


After the financial crisis in 2008 and early 2009, the Federal Reserve (Fed) started on a path of quantitative easing (QE) by buying government securities to support bond prices and lower interest rates in an effort to stimulate the economy. The first massive purchase of securities was known as QE1. Most reasonable institutional investors considered QE1 to be a prudent response to the crisis. Although QE1 helped to bolster asset prices (stocks, bonds and commodities), economic conditions didnt improve as much as hoped and unemployment remained stubbornly high. The Feds second round of quantitative easing (QE2) and so-called Operation Twistthe simultaneous sale of short-term Treasuries and purchase of long-term Treasuries in an effort to lower long-term rateswas met with increasing skepticism among institutional investors. But there was still some sympathy for the Feds predicament in trying to meet its dual mandate of promoting maximum employment and stable prices, especially with the concerns surrounding the earthquake and nuclear crisis in Japan.

Now we come to a third round of quantitative easing (QE3) and a commitment from the Federal Reserve to keep interest rates at extremely low levels at least through 2015. Fed Chairman Ben Bernanke argues that, in the absence of reasonable fiscal policies coming from our politicians, QE3 is the best alternative. I strongly disagree. If I were in Chairman Bernankes shoes, Id issue a statement that the Fed has already done what it can to put the economy on the right track, and that its now time for the Executive Branch and Congress to take the lead in tackling the critical fiscal issues of taxes, spending, debt, deficits, infrastructure, education and employment.

I believe the Federal Reserve is out of ammunition primarily because low interest rates alone cant stimulate the economy and bring down unemployment. As I see it, the problems in our economy have more to do with confidence and demand. An entrepreneur recently told me that when he was young and inexperienced, he had no trouble getting financing. Now, even though hes older and has a successful track record, banks are unwilling to lend. In addition to the challenges in obtaining financing, companies are faced with weak demand from customers who are dealing with their own economic problems. Ironically, announcing QE3 may have actually scared some businesspeople more as they could view the Feds action as a sign that conditions are getting weaker.

The main beneficiaries of low interest rates have been large companies that are able to refinance their debt, and large banks that pay little or nothing on deposits and earn a modest spread by investing in Treasuries. Stock, bond and commodity prices have also benefited in general, partially due to the perception that the Federal Reserve has been targeting asset prices as a way to improve confidence in the economy.

Unfortunately, many people havent participated in these asset-price improvements because theyve mostly stayed out of the markets after the devastation in 2008 and early 2009. There have been stronger flows into intermediate- and longer-term fixed-income investments, however. I just hope that investors understand the price risks in these investments when interest rates eventually rise.

Political gridlock in Washington is about as bad as Ive ever seen during my career. And were fast approaching the fiscal cliff in which tax cuts are set to expire and federal spending is scheduled to be reduced. Although taxes and spending need to be dealt with comprehensively over the long term, the automatic tax increases and spending reductions arent what the economy needs right now. Im cautiously optimistic that the ideologues on both sides of the aisle will get their acts together and initiate a compromise because the political fallout of inaction would be enormous. After we get past the fiscal cliff, I believe that two of the most pressing issues we face today are infrastructure and education. If were not strong in both of these areas, we wont be able to effectively compete on a global basis, grow our economy, employ our people, and pay off our debts.


Despite the challenges in the economy, the overall stock market and most of the companies in our portfolios advanced strongly during the third quarter of 2012. Including reinvested dividends, the S&P 500 Index was up 6.35% for the quarter. Anticipation of QE3 probably played a role in this market advance. But in many cases, I believe that company fundamentals also played a role. Indeed, when I speak to the managements of many of the companies we own, Im impressed by their resilience. I often hear that our companies are doing well by providing cost-effective products and services to their struggling customers. So the recurring theme seems to be efficiency. Companies that help their customers be efficient and save money are typically the ones we find most attractive as investments.

This focus on efficiency often leads us to companies that are front and center in the information-related economy. For example, technology tends to be less capital intensive than manufacturing. And if a technology company is successful, its cash flows and profits can be enormous relative to the cost of starting the business. I believe the high level of cash being generated by some companies, particularly tech companies, is responsible for a good portion of the stock buybacks were seeing today. Buying back stock may be especially attractive to companies because buybacks tend to be more discretionary than increasing a dividend, which establishes an expectation of a commitment going forward. Look at a company like tech giant Apple. The shares currently trade at just 14 times (forward) estimated earnings, so buying back stock is a good way to increase shareholder value during periods when the companys excess cash isnt needed for continuing operations, new ventures or acquisitions.


Like many of the technology companies in which we often invest, our business at Wasatch Advisors isnt capital intensive. Our people are our most important assets. Thats why we invest heavily in their education and training, give them the resources they need to succeed, and try to create a stimulating work environment.

A further aspect of getting the most from our peopleand therefore offering

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