Among the Investor Gurus we track at GuruFocus.com, Jeremy Grantham and John Hussman are the most vocal on their bearish view towards the current stock market valuation level.
The Morningstar Review
Morningstar’s Ryan Leggio recently looked into the expected long term returns of a few notable managers that have great long-term track records, including Grantham and Hussman. Here is the video:
Summary of Opinions:
Grantham’s Quarterly Letter and Hussman’s Weekly Market Commentary
The two men expressed their bearish view towards the stock market very recently.
In the newly published quarterly letter entitled “Playing with Fire (A Possible Race to the Old Highs) ”,Grantham repeated his fair value estimate for S&P500 of 875, and called the rally above that level “speculation”. Grantham did not rule out the possibility of the fool’s rally will reach the old highs 1500-1600 level, but that will only serve to make the equity market return in the future even less attractive.
Hussman, on the other hand, has long since fully hedged his stock portfolio with options in equity index. As a matter of fact, Hussman has been fully hedged for a good part of the past decade, and only meaningful exposed to the market occasionally, earned him a name “perm-bear”. His strategy has been largely successful. According to Hussman Funds’ Semi-annual report published on December 31, 2009, Hussman Strategy Growth Fund returned 8.19% per year since inception on July 24, 2000, beating the S&P 500’s -1.04% per year handily. It is also remarkable to notice that without the hedging, the stock-only portfolio also returned 6.53% per year.
Hussman does not liked to be labeled as “Perm-Bear”, insisting when the both market valuation level is attractive and “market action” (a proprietary technical measurement) is favorable, he will be perfectly willing to go aggressive. But those times have been so rare in the past decade. For now, he is firmly bearish, as reflected in his weekly market commentary for this week Looking Backward, Looking Forward.
There Is Hope
Despite the bearish view, in the latest published GMO 7-year Asset Class Return Forecast as of March 31, 2010, Grantham and his firm think the high quality domestic stocks will stand for the best chance to provide a decent return in the next seven years of 6.1%, outperforming any other equity strategies (US large cap, US small cap, international large or small, and emerging market). Based on the company’s historical performance, they think they stand for a chance of returning an extra 1.8% above the market, hence, attaining a 7.9% return per year in the next seven year – a period that the firm predicts to be “seven lean years”.
GMOAssetAllocationApril2010 .
Again in the recent quarterly letter, Grantham recommended:
Despite he writes on often (weekly vs. quarterly), Hussman is not so specific on the sectors or the individual stocks he would like to hold at any given time. In times when he is fully hedged, he expects the excessive performance of his stock holdings over the market return to deliver the return. As for his stock valuation and selection methodology, he offered this description in a document on his website entitle Understanding the Hussman Funds.
Nothing fancy and black box approach here, just the old criteria of comparing price with free cash flow. It is fair to say that Hussman has the tendency to select high quality stocks at low valuation to begin with.
Stock Ideas Shared
So what stocks do the two bears – Grantham and Hussman – hold in common? This is an area where GuruFocus.com can of help. Our Aggregated Guru Portfolio makes the task extremely easy. Honestly, I am surprised they share more than 50 stock ideas (the program only print the top 50 stocks, and they are all shared between the two portfolios).
Here are the representatives of the top 50 stocks shared:
Exxon Mobil Corp. (XOM, Financial)
Exxon Mobil Corporation's principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacturing of petroleum products and transportation and sale of crudeoil, natural gas and petroleum products. Exxon Mobil Corp. has a market cap of $322.32 billion; its shares were traded at around $68.27 with a P/E ratio of 17 and P/S ratio of 1.1. The dividend yield of Exxon Mobil Corp. stocks is 2.4%. GuruFocus rated Exxon Mobil Corp. the business predictability rank of 4-star.
Hussman bought 1,000,000 shares in the quarter that ended on 12/31/2009. Grantham held 14.58 million shares at the same time.
Microsoft Corp. (MSFT, Financial)
Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of computing devices. Microsoft Corp. has a market cap of $270.53 billion; its shares were traded at around $30.845 with a P/E ratio of 15.9 and P/S ratio of 4.7. The dividend yield of Microsoft Corp. stocks is 1.7%.
John Hussman owns 2,000,000 shares as of 12/31/2009, a decrease of 33.33% of from the previous quarter. Grantham held 52.12 million shares at the end of the same quarter.
Johnson & Johnson (JNJ, Financial)
Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. Johnson & Johnson has a market cap of $177.17 billion; its shares were traded at around $64.28 with a P/E ratio of 13.8 and P/S ratio of 2.9. The dividend yield of Johnson & Johnson stocks is 3%. Johnson & Johnson had an annual average earning growth of 12.2% over the past 10 years. GuruFocus rated Johnson & Johnson the business predictability rank of 5-star.
John Hussman owns 1,000,000 shares as of 12/31/2009, a decrease of 50% of from the previous quarter. Grantham held 25.8 million shares at the same time.
International Business Machines Corp (IBM, Financial)
IBM uses advanced information technology to provide customer solutions. International Business Machines Corp has a market cap of $167.34 billion; its shares were traded at around $128.82 with a P/E ratio of 12.5 and P/S ratio of 1.8. The dividend yield of International Business Machines Corp stocks is 1.7%. International Business Machines Corp had an annual average earning growth of 10.7% over the past 10 years.
John Hussman owns 250,000 shares as of 12/31/2009, a decrease of 37.5% of from the previous quarter. Grantham held 4.55 million shares at the same time.
Chevron Corp. (CVX, Financial)
Chevron is the fifth-largest integrated energy company in the world. Chevron Corp. has a market cap of $161.13 billion; its shares were traded at around $80.23 with a P/E ratio of 16.6 and P/S ratio of 1. The dividend yield of Chevron Corp. stocks is 3.4%. Chevron Corp. had an annual average earning growth of 11.5% over the past 10 years. GuruFocus rated Chevron Corp. the business predictability rank of 3-star.
John Hussman bought 142,000 shares in the quarter that ended on 12/31/2009. Grantham held 11 million shares at the same time.
Cisco Systems Inc. (CSCO, Financial)
Cisco Systems, Inc. is the worldwide leader in networking for the Internet. Cisco Systems Inc. has a market cap of $154.65 billion; its shares were traded at around $27.01 with a P/E ratio of 23.5 and P/S ratio of 4.3. Cisco Systems Inc. had an annual average earning growth of 20% over the past 10 years. GuruFocus rated Cisco Systems Inc. the business predictability rank of 3.5-star.
John Hussman held 6 million shares in the quarter that ended on 12/31/2009.Grantham held 37 million shares at the same time.
Pfizer Inc (PFE)
Pfizer Inc is a research-based, global pharmaceutical company that discovers and develops innovative, value-added products that improve the quality of life of people around the world and help them enjoy longer, healthier, and more productive lives. Pfizer Inc has a market cap of $132.8 billion; its shares were traded at around $16.46 with a P/E ratio of 8.1 and P/S ratio of 2.6. The dividend yield of Pfizer Inc stocks is 4.4%.
John Hussman owns 1,750,000 shares as of 12/31/2009, an increase of 16.67% from the previous quarter. Grantham held 73.7 million shares at the same time.
Oracle Corp. (ORCL, Financial)
Oracle Corporation is one of the world's suppliers of software for information management. Oracle Corp. has a market cap of $130.19 billion; its shares were traded at around $25.98 with a P/E ratio of 17.8 and P/S ratio of 5.6. The dividend yield of Oracle Corp. stocks is 0.8%. Oracle Corp. had an annual average earning growth of 20.5% over the past 10 years. GuruFocus rated Oracle Corp. the business predictability rank of 3-star.
John Hussman owns 2,000,000 shares as of 12/31/2009, a decrease of 63.64% of from the previous quarter. Grantham held 62 million shares at the same time.
Intel Corp. (INTC, Financial)
Intel Corporation, one of the world's largest semiconductor chip maker, supplies the computing and communications industries with chips, boards, and systems building blocks that are integral to computers, servers, and networking and communications products. Intel Corp. has a market cap of $128.99 billion; its shares were traded at around $23.35 with a P/E ratio of 17.4 and P/S ratio of 3.6. The dividend yield of Intel Corp. stocks is 2.7%. Intel Corp. had an annual average earning growth of 2.5% over the past 10 years.
John Hussman owns 2,000,000 shares as of 12/31/2009, a decrease of 50% of from the previous quarter. Grantham held 1.11 million shares at the same time.
The CocaCola Company (KO, Financial)
The Coca-Cola Company is the world's largest beverage company and is the producer and marketer of soft drinks. The Cocacola Company has a market cap of $121.87 billion; its shares were traded at around $52.87 with a P/E ratio of 16.5 and P/S ratio of 3.9. The dividend yield of The Cocacola Company stocks is 3.4%. The Cocacola Company had an annual average earning growth of 9.1% over the past 10 years. GuruFocus rated The Cocacola Company the business predictability rank of 3.5-star.
John Hussman bought 1,500,000 shares in the quarter that ended on 12/31/2009. Grantham held 21.5 million shares at the same time.
Conclusion
Two bears of the stock market of our times – Hussman and Grantham share a long list of long stock ideas. Keeping in mind the recent market views of the two, no wonder the top ones are very high quality blue chip names.
To see more of the list or the stocks shared by any group of Investment Gurus of your choice, click here.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett, John Hussman, and Jeremy Grantham for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
The Morningstar Review
Morningstar’s Ryan Leggio recently looked into the expected long term returns of a few notable managers that have great long-term track records, including Grantham and Hussman. Here is the video:
Summary of Opinions:
Jeremy Grantham of GMO:
- Most pessimistic among the group, predicting about 3% in the next seven years. [/b]
- Back in March 2009, they were actually projecting great returns for the S&P, about 9%-10% annualized over the next seven years. So they're not always pessimistic, but now with the big market run-up, they're definitely more pessimistic about the S&P 500.
John Hussman:
- Developed a proprietary metric called the price-to-peak earnings multiple. He looks at the peak earnings however many years back, puts the price in the S&P, and then tries to figure out, again, going from a regular P/E multiple of what the market is back down to its median or historical average, what would the valuation be.
- He recently put up the numbers, and for the next 10 years he's forecasting 5.7%.
- He was forecasting well in excess of 10% at the March 2009 bottoms, and that number has come in considerably.
Grantham’s Quarterly Letter and Hussman’s Weekly Market Commentary
The two men expressed their bearish view towards the stock market very recently.
In the newly published quarterly letter entitled “Playing with Fire (A Possible Race to the Old Highs) ”,Grantham repeated his fair value estimate for S&P500 of 875, and called the rally above that level “speculation”. Grantham did not rule out the possibility of the fool’s rally will reach the old highs 1500-1600 level, but that will only serve to make the equity market return in the future even less attractive.
Hussman, on the other hand, has long since fully hedged his stock portfolio with options in equity index. As a matter of fact, Hussman has been fully hedged for a good part of the past decade, and only meaningful exposed to the market occasionally, earned him a name “perm-bear”. His strategy has been largely successful. According to Hussman Funds’ Semi-annual report published on December 31, 2009, Hussman Strategy Growth Fund returned 8.19% per year since inception on July 24, 2000, beating the S&P 500’s -1.04% per year handily. It is also remarkable to notice that without the hedging, the stock-only portfolio also returned 6.53% per year.
Hussman does not liked to be labeled as “Perm-Bear”, insisting when the both market valuation level is attractive and “market action” (a proprietary technical measurement) is favorable, he will be perfectly willing to go aggressive. But those times have been so rare in the past decade. For now, he is firmly bearish, as reflected in his weekly market commentary for this week Looking Backward, Looking Forward.
As of last week, our most comprehensive measure of market valuation reached a price-to-normalized earnings multiple of 19.1, exceeding the peaks of August 1987 (18.6) and December 1973 (18.3). Outside of the valuations achieved during the late 1990's bubble and the approach to the 2007 market peak, the only other historical observation exceeding the current level of valuation was the extreme of 20.1 reached just prior to the 1929 crash. The corollary to this level of rich valuation is that our projection for 10-year total returns for the S&P 500 is now just 5.3% annually.
There Is Hope
Despite the bearish view, in the latest published GMO 7-year Asset Class Return Forecast as of March 31, 2010, Grantham and his firm think the high quality domestic stocks will stand for the best chance to provide a decent return in the next seven years of 6.1%, outperforming any other equity strategies (US large cap, US small cap, international large or small, and emerging market). Based on the company’s historical performance, they think they stand for a chance of returning an extra 1.8% above the market, hence, attaining a 7.9% return per year in the next seven year – a period that the firm predicts to be “seven lean years”.
Again in the recent quarterly letter, Grantham recommended:
Our policy is simple: however complicated the world may be, we will play by the numbers. The global equity markets taken together are moderately overpriced, and the U.S. part is now very overpriced but not nearly so bad as it could be. Surprisingly, within the U.S. the large high quality companies are still a little cheap, having been left totally behind in the rally. They are unlikely to do very well in a bubbly environment, however long it lasts, but should be great in declines and in the end should win. A potential plus for quality franchise stocks in the next few years is that they are far more exposed to emerging countries and, as investors fall in love with all things emerging, this should be seen as an increasing advantage. A mix of global stocks, tilted to U.S. high quality, has a 7-year asset class forecast of about 5% excluding inflation compared with a long-term normal of about 6%. Not so bad. On balance, therefore, we are only slightly underweight equities.
Despite he writes on often (weekly vs. quarterly), Hussman is not so specific on the sectors or the individual stocks he would like to hold at any given time. In times when he is fully hedged, he expects the excessive performance of his stock holdings over the market return to deliver the return. As for his stock valuation and selection methodology, he offered this description in a document on his website entitle Understanding the Hussman Funds.
Favorable valuation means that security prices appear reasonable in view of the stream of cash flows expected in the future. While earnings are important, the simple fact is that stocks are not a claim on earnings. In order to provide for future growth, a portion of earnings is reinvested in capital that will depreciate away. A portion is diluted by grants of options to corporate insiders. A portion must be retained as working capital to support future revenue growth. Stocks are a claim on free cash flow - the portion of earnings that remains after all other claims have been satisfied. This free cash flow can be used either to pay dividends or to repurchase stock for the benefit of shareholders (reducing the number of shares outstanding and thereby increasing the ownership stake of existing shareholders). The higher the price an investor pays for a given stream of future cash flows, the lower the long-term return earned by that investor. The lower the price an investor pays for a given stream of future cash flows, the higher the long-term return earned by that investor.
Nothing fancy and black box approach here, just the old criteria of comparing price with free cash flow. It is fair to say that Hussman has the tendency to select high quality stocks at low valuation to begin with.
Stock Ideas Shared
So what stocks do the two bears – Grantham and Hussman – hold in common? This is an area where GuruFocus.com can of help. Our Aggregated Guru Portfolio makes the task extremely easy. Honestly, I am surprised they share more than 50 stock ideas (the program only print the top 50 stocks, and they are all shared between the two portfolios).
Here are the representatives of the top 50 stocks shared:
| Symbol | Company | Combined Weightings (%) | P/E | Yield (%) |
|---|---|---|---|---|
| XOM | Exxon Mobil Corp. | 4.65 | 17.3 | 2.4 |
| MSFT | Microsoft Corp. | 6.48 | 16 | 1.7 |
| JNJ | Johnson & Johnson | 6.80 | 13.9 | 3 |
| IBM | International Business Machines Corp | 2.63 | 12.7 | 1.7 |
| CVX | Chevron Corp. | 3.04 | 17.1 | 3.3 |
| CSCO | Cisco Systems Inc. | 5.79 | 24 | 0 |
| PFE | Pfizer Inc | 5.08 | 8.3 | 4.3 |
| ORCL | Oracle Corp. | 6.02 | 18.1 | 0.8 |
| INTC | Intel Corp. | 0.89 | 17.8 | 2.6 |
| KO | The CocaCola Company | 5.78 | 16.8 | 3.3 |
Exxon Mobil Corp. (XOM, Financial)
Exxon Mobil Corporation's principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacturing of petroleum products and transportation and sale of crudeoil, natural gas and petroleum products. Exxon Mobil Corp. has a market cap of $322.32 billion; its shares were traded at around $68.27 with a P/E ratio of 17 and P/S ratio of 1.1. The dividend yield of Exxon Mobil Corp. stocks is 2.4%. GuruFocus rated Exxon Mobil Corp. the business predictability rank of 4-star.
Hussman bought 1,000,000 shares in the quarter that ended on 12/31/2009. Grantham held 14.58 million shares at the same time.
Microsoft Corp. (MSFT, Financial)
Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of computing devices. Microsoft Corp. has a market cap of $270.53 billion; its shares were traded at around $30.845 with a P/E ratio of 15.9 and P/S ratio of 4.7. The dividend yield of Microsoft Corp. stocks is 1.7%.
John Hussman owns 2,000,000 shares as of 12/31/2009, a decrease of 33.33% of from the previous quarter. Grantham held 52.12 million shares at the end of the same quarter.
Johnson & Johnson (JNJ, Financial)
Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. Johnson & Johnson has a market cap of $177.17 billion; its shares were traded at around $64.28 with a P/E ratio of 13.8 and P/S ratio of 2.9. The dividend yield of Johnson & Johnson stocks is 3%. Johnson & Johnson had an annual average earning growth of 12.2% over the past 10 years. GuruFocus rated Johnson & Johnson the business predictability rank of 5-star.
John Hussman owns 1,000,000 shares as of 12/31/2009, a decrease of 50% of from the previous quarter. Grantham held 25.8 million shares at the same time.
International Business Machines Corp (IBM, Financial)
IBM uses advanced information technology to provide customer solutions. International Business Machines Corp has a market cap of $167.34 billion; its shares were traded at around $128.82 with a P/E ratio of 12.5 and P/S ratio of 1.8. The dividend yield of International Business Machines Corp stocks is 1.7%. International Business Machines Corp had an annual average earning growth of 10.7% over the past 10 years.
John Hussman owns 250,000 shares as of 12/31/2009, a decrease of 37.5% of from the previous quarter. Grantham held 4.55 million shares at the same time.
Chevron Corp. (CVX, Financial)
Chevron is the fifth-largest integrated energy company in the world. Chevron Corp. has a market cap of $161.13 billion; its shares were traded at around $80.23 with a P/E ratio of 16.6 and P/S ratio of 1. The dividend yield of Chevron Corp. stocks is 3.4%. Chevron Corp. had an annual average earning growth of 11.5% over the past 10 years. GuruFocus rated Chevron Corp. the business predictability rank of 3-star.
John Hussman bought 142,000 shares in the quarter that ended on 12/31/2009. Grantham held 11 million shares at the same time.
Cisco Systems Inc. (CSCO, Financial)
Cisco Systems, Inc. is the worldwide leader in networking for the Internet. Cisco Systems Inc. has a market cap of $154.65 billion; its shares were traded at around $27.01 with a P/E ratio of 23.5 and P/S ratio of 4.3. Cisco Systems Inc. had an annual average earning growth of 20% over the past 10 years. GuruFocus rated Cisco Systems Inc. the business predictability rank of 3.5-star.
John Hussman held 6 million shares in the quarter that ended on 12/31/2009.Grantham held 37 million shares at the same time.
Pfizer Inc (PFE)
Pfizer Inc is a research-based, global pharmaceutical company that discovers and develops innovative, value-added products that improve the quality of life of people around the world and help them enjoy longer, healthier, and more productive lives. Pfizer Inc has a market cap of $132.8 billion; its shares were traded at around $16.46 with a P/E ratio of 8.1 and P/S ratio of 2.6. The dividend yield of Pfizer Inc stocks is 4.4%.
John Hussman owns 1,750,000 shares as of 12/31/2009, an increase of 16.67% from the previous quarter. Grantham held 73.7 million shares at the same time.
Oracle Corp. (ORCL, Financial)
Oracle Corporation is one of the world's suppliers of software for information management. Oracle Corp. has a market cap of $130.19 billion; its shares were traded at around $25.98 with a P/E ratio of 17.8 and P/S ratio of 5.6. The dividend yield of Oracle Corp. stocks is 0.8%. Oracle Corp. had an annual average earning growth of 20.5% over the past 10 years. GuruFocus rated Oracle Corp. the business predictability rank of 3-star.
John Hussman owns 2,000,000 shares as of 12/31/2009, a decrease of 63.64% of from the previous quarter. Grantham held 62 million shares at the same time.
Intel Corp. (INTC, Financial)
Intel Corporation, one of the world's largest semiconductor chip maker, supplies the computing and communications industries with chips, boards, and systems building blocks that are integral to computers, servers, and networking and communications products. Intel Corp. has a market cap of $128.99 billion; its shares were traded at around $23.35 with a P/E ratio of 17.4 and P/S ratio of 3.6. The dividend yield of Intel Corp. stocks is 2.7%. Intel Corp. had an annual average earning growth of 2.5% over the past 10 years.
John Hussman owns 2,000,000 shares as of 12/31/2009, a decrease of 50% of from the previous quarter. Grantham held 1.11 million shares at the same time.
The CocaCola Company (KO, Financial)
The Coca-Cola Company is the world's largest beverage company and is the producer and marketer of soft drinks. The Cocacola Company has a market cap of $121.87 billion; its shares were traded at around $52.87 with a P/E ratio of 16.5 and P/S ratio of 3.9. The dividend yield of The Cocacola Company stocks is 3.4%. The Cocacola Company had an annual average earning growth of 9.1% over the past 10 years. GuruFocus rated The Cocacola Company the business predictability rank of 3.5-star.
John Hussman bought 1,500,000 shares in the quarter that ended on 12/31/2009. Grantham held 21.5 million shares at the same time.
Conclusion
Two bears of the stock market of our times – Hussman and Grantham share a long list of long stock ideas. Keeping in mind the recent market views of the two, no wonder the top ones are very high quality blue chip names.
To see more of the list or the stocks shared by any group of Investment Gurus of your choice, click here.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett, John Hussman, and Jeremy Grantham for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
