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  | | JANUARY 13, 2004 • Editions: Edition Preference
"A First-Half Run for the Market" John Lynch of Evergreen Investments sees strength on the Street in the first months of the year, followed by more moderate gains Two stock sectors that could do well in 2004 are cyclicals and health care, in the view of John Lynch, managing director and chief market analyst of Evergreen Investments. He likes cyclicals because of the increase in business spending and demand, citing in particular industrial stocks such as Caterpillar (CAT ), Deere (DE ), and General Electric (GE ). In health care, Lynch mentions Johnson & Johnson (JNJ ) and Medtronics (MDT ), among others, and points out that both regulatory and demographic trends favor that sector. Lynch says he expects "a first-half run for the market" moderating to "good levels, but not great levels" later in the year. It ALSO will be a good year to increase international investments -- he recommends going from, say, 10% international stocks to 15%, and especially likes China-related investments. These were some of the points Lynch made in an investing chat presented Jan. 8 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and Karyn McCormack. Edited excerpts follow. A full transcript is available on AOL at keyword: BW Talk. Q: John, how happy a new year do you expect for stocks? A: Well, I expect it to be a pleasant new year. The vibes are very good right now: '03 was a good year, the market moved on some clarity in Iraq, there was dividend incentive, fiscal stimulation, corporate profits were rising -- and we're looking for many of those trends to continue in 2004. Q: I've heard some market analysts say that the market could have a nice run until midyear. Do you think we could have the same returns this year as 2003? A: No, I don't think 2003 can be repeated. I tend to be in the camp for a first-half run for the market. I suspect that the consumer will do well, due to up to $100 billion in tax refunds this year, and I think that business spending will continue at a very strong pace for the first half of the year. I see both those trends as moderating to good levels, but not great levels. I see GDP growth as about 4.5% in the first half of the year, moderating to about 3% in the second half of the year. In that environment, I expect corporate profits to rise approximately 10% for 2004. Q: What sector, and what stocks specifically within that sector, do you see doing well in the 2004 economy? A: In the first half of 2004, I think cyclical stocks, anything with cyclical exposure, should do well, particularly with the global increase in demand and business spending. The industrial sector will do well -- particularly companies like Caterpillar (CAT ) and Deere (DE ). Even General Electric (GE ) has room to move from current levels. For the balance of the year, I'm looking for health care. It may not have the solid returns that the industrials will have in the first half, but the favorable regulatory environment and the demographic environment will push the sector higher. Johnson & Johnson (JNJ ) is diversified and has exposure to hospital supply and pharmas. Medtronic (MDT ) also looks attractive to me at these levels. Q: John, do you think we are still in a cyclical bull within a secular bear market? A: That's an excellent question, and history will determine the answer. It's my strong belief that we've entered another secular bull. There's tremendous concern that the situation is as you said. I don't like to bring politics into the equation, but in this case it matters. If the current Administration is extended, and the tax cuts allowed to continue, that will give the bull more legs to run. If the current fiscal policies are voted out, it's my strong suspicion that this may not happen. This fiscal policy needs more than two years to run -- period. Q: What about tech stocks rebounding more? Are you recommending any names in tech? A: Yes, I really like tech long-term. The challenge with tech right now is that the stocks were up 45% to 50% in 2003, yet earnings for the sector only grew about 15%. That's a very strong, or very high p-e/earnings growth rate, ratio. The counterargument to that is that consensus forecasts are saying that the tech sector can grow earnings 60% in 2004, yet the calendar p-e is only 30 times. I think 60% is too aggressive for '04 -- I don't think businesses will spend in the second half of this year to the extent that they have been spending, so there could be some disappointment over the short term. Tech will run the first half of the year, but that's the group most poised for disappointment in the second half. Still, a great long-term holding, though, because I do believe that we're the most efficient workforce in the world because of Grove at Intel (INTC ) and Gates at Microsoft (MSFT ), and the like. Longer-term, still a very good play. I just want investors to look at more of the market-share-type plays and rein in expectations a bit. In the group, I still like Dell (DELL ). I think it's a very innovative company that could probably exceed $42 over the next 12 months. Intel long-term is one of my favorites, but I think it's getting a little expensive. Microsoft, surprisingly, didn't move all that much last year, and I think they can get into the low to mid-30s 12 months out. Q: Which asset class do you expect will outperform this year -- small, mid, or large caps? And do you anticipate growth will outperform value this year? A: Another excellent question. Growth outperformed value for much of 2003, but for the last six weeks we saw value come back into play. There's still very little compelling argument to overweight one or the other right now. From a capitalization standpoint, small caps have done very well the last two or three years, and I think their legs are getting tired. When you consider synchronized global growth, and attractive valuations of large vs. small, looking also at the weaker dollar, which can benefit the larger, multinational-type companies, I'd recommend investors overweight large- vs. small-cap companies in their portfolios.
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