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The firm published its annual report for the Odyssey Funds. Here is the firms outlook (emphasis mine):
Looking ahead to fiscal year 2011, we are generally encouraged by the prospects for equity returns, especially when compared to most other asset classes. With 10-year Treasury bonds yielding less than 3% and money market funds yielding virtually nothing, we believe stocks, with a prospective earnings yield of over 7 .5% and the potential for capital appreciation, represent an attractive alternative .
However, there are several macro-level concerns that temper our optimism. The current fiscal and monetary policies in the United States may ultimately lead to a rise in inflation and a weaker U .S . dollar – which recently touched a 15-year low against the Japanese yen and has weakened against the euro. Longer term, we believe it will be difficult for the United States to sustain current fiscal policies in an environment where spending needs and future obligations are increasing faster than tax revenues. As the recent problems in Greece, Ireland, and other European countries demonstrate, it is difficult to increase government spending more rapidly than the growth rate of the broader economy for an extended period. Increased regulations and other government intervention into the private sector are even more troubling, as they distort economic incentives and introduce uncertainty about the future environment for businesses and consumers. We believe that market forces result in a more efficient allocation of resources than government programs .
Despite these concerns, we have a generally positive outlook for U .S .equities .We believe valuations for many companies are attractive relative to their prospects for revenue and earnings growth and the strength and quality of their balance sheets. We would highlight three factors. First, many U .S . companies appear well-positioned to benefit from the long-term impact of globalization and the continued development of emerging markets .While growth in the domestic economy may be moderate at best, many U .S .corporations generate an increasing portion of their revenues and earnings from abroad . Second, we are enthusiastic about the potential for innovation by U .S . companies. We expect that substantial investment in research and development will lead to the development of new products and services that improve productivity for businesses and quality of life for consumers. This should result in revenue and earnings growth opportunities that are not reflected in current expectations .In particular, we remain committed to our sizeable holdings in the health care and information technology sectors. These two sectors also represent areas where the United States has a strong competitive advantage relative to the rest of the world. Third, the balance sheets of U .S . corporations are as strong and liquid as they have ever been. Many companies are holding considerable cash balances, which represent an under-utilized asset in the current low interest rate environment but could be a source of higher returns in the future. We will continue to look for opportunities to invest in companies with strong balance sheets that we believe are well-positioned to benefit from innovation and globalization.
Read the full letter here
The firm’s top holdings as of the September 30, 2009 agree with the firm’s sector assessment:
No. 1: Amgen Inc. (NASDAQ:AMGN), Weightings: 4.18% - 46,499,746 Shares
Amgen Inc. discovers, develops and delivers innovative human therapeutics. Amgen Inc. has a market cap of $53.58 billion; its shares were traded at around $56.71 with a P/E ratio of 11.27 and P/S ratio of 3.66. Amgen Inc. had an annual average earning growth of 18.1% over the past 10 years. GuruFocus rated Amgen Inc. the business predictability rank of 4-star.
No. 2: Eli Lilly and Company (NYSE:LLY), Weightings: 3.78% - 63,434,533 Shares
Eli Lilly and Company discovers, develops, manufactures, and sells products in one significant business segment -pharmaceutical products. Eli Lilly And Company has a market cap of $40.63 billion; its shares were traded at around $35.23 with a P/E ratio of 7.76 and P/S ratio of 1.86. The dividend yield of Eli Lilly And Company stocks is 5.56%.
No. 3: Novartis AG (NYSE:NVS), Weightings: 3.18% - 33,816,772 Shares
Novartis AG is committed to improving health and well-being through innovative products and services. Novartis Ag has a market cap of $134.67 billion; its shares were traded at around $58.82 with a P/E ratio of 11.72 and P/S ratio of 3.04. The dividend yield of Novartis Ag stocks is 2.81%. Novartis Ag had an annual average earning growth of 14.2% over the past 10 years. GuruFocus rated Novartis Ag the business predictability rank of 5-star.
No. 4: FedEx Corp. (NYSE:FDX), Weightings: 3.06% - 21,953,705 Shares
FedEx Corporation is a global transportation and logistics enterprise that offers customers a one-stop source for global shipping, logistics and supply chain solutions. Fedex Corp. has a market cap of $29.26 billion; its shares were traded at around $93.01 with a P/E ratio of 20.9 and P/S ratio of 0.84. The dividend yield of Fedex Corp. stocks is 0.52%. Fedex Corp. had an annual average earning growth of 1.8% over the past 10 years.
No. 5: Google Inc. (NASDAQ:GOOG), Weightings: 2.81% - 3,269,668 Shares
Google is a public and profitable company focused on search services. Google Inc. has a market cap of $193.22 billion; its shares were traded at around $604.23 with a P/E ratio of 24.54 and P/S ratio of 8.17. Google Inc. had an annual average earning growth of 65.7% over the past 10 years.
No. 6: DIRECTV Group Inc. The (DTV), Weightings: 2.72% - 40,041,422 Shares
DIRECTV is a provider of digital multichannel television entertainment in the United States and Latin America. Directv Group Inc. The has a market cap of $33.28 billion; its shares were traded at around $39.92 with a P/E ratio of 17.98 and P/S ratio of 1.54.
Check out firm’s other holdings by clicking on PRIMECAP Management.