Opportunity Lying in Plain Sight

As Motley Fools, we champion the individual investor. Heck, that's most often who we are -- people who love stocks and have fun testing their mettle against Mr. Market. And while we love the average Joe, getting the best, most accurate information before pulling the trigger on an investment decision is a must. Today, you'll hear about where one investment manager -- who nearly aced predicting asset class returns during the last economic cycle -- thinks the best chances for investment success lie today and some examples of specific stocks that fit this bill.

Too easy to miss
Most intense, fundamental investors probably already know of endowment manager GMO, shorthand for Grantham, Mayo, Van Otterloo. And if you have them on your radar, you probably know the firm best for co-founder Jeremy Grantham's quarterly letters to investors. Full of wit and wisdom (those Harvard MBAs are wicked-schmaat), Mr. Grantham has a well-deserved reputation as one of the most fundamentals-oriented investors in the biz.

GMO, where Grantham serves as head of investments, routinely issues projections, with alarming accuracy, of the prospective long-term returns of most major asset classes. For the period spanning from July 1998 to June 2008, the firm predicted the order of returns, from greatest to least, for 10 major asset classes with impressive accuracy (only two misses -- foreign bonds outperformed Treasury bills and EAFE stocks barely bested U.S. government bonds; GMO predicted the opposite in both cases). Emerging market equities led the pack, followed by U.S. REITs, emerging market debt, international small caps, and on down the line. Even more impressively, in all but one case, the company predicted the actual percentage return for each asset class within 2 percentage points of its actual return. The firm also forecast a negative 1% return for the S&P during the period. It returned essentially nothing over that 10-year stretch. Might as well be a bull's-eye.

Suffice it to say, these guys know their stuff. So how does that benefit you? The company continues to issue its asset class forecasts. And where do you think they see the best opportunities today? Let's find out.

Think big
As of the end of last month, GMO liked high-quality U.S. stocks and international stocks as well. It predicted 7.2% real annual returns for international large caps and emerging markets. U.S. high-quality stocks are forecast to produce returns in the neighborhood of 6.6%. It should be noted that GMO also provides an estimated range (e.g., plus or minus 6% for U.S. high-quality). However, given their prowess as detailed above, using these predictions as the starting point for stock-specific research seems pretty reasonable.

The firm also puts its money where its mouth is. The firm's top 10 holdings all come straight out of the U.S. high-quality category.

Company

Dividend Yield

Price-to-Earnings

1-Year Expected EPS Growth Rate

Microsoft (Nasdaq: MSFT  ) 2.97% 10.01 6.39%
Johnson & Johnson (NYSE: JNJ  ) 3.54% 15.41 4.12%
Oracle (Nasdaq: ORCL  ) 0.77% 17.61 8.84%
Pfizer (NYSE: PFE  ) 4.23% 17.63 0.75%
Coca-Cola (NYSE: KO  ) 2.81% 12.46 10.32%
Philip Morris (NYSE: PM  ) 4.66% 15.13 22.92%
Cisco Systems (Nasdaq: CSCO  ) 1.40% 14.61 5.00%
Wal-Mart (NYSE: WMT  ) 2.66% 12.42 10.37%
Apple (Nasdaq: AAPL  ) 0.00% 15.38 83.26%
Google (Nasdaq: GOOG  ) 0.00% 19.38 19.84%
Unweighted Average 2.31% 15.01 17.18%

Source: S&P Capital IQ.

A portfolio comprising these kind of large, safe stocks has a lot of advantages, especially in today's investing climate. In terms of risk, these companies are relatively safe. Thanks to their size, they stand a great chance of weathering the likely challenging economic situation going forward, in no small part thanks to their ability to access capital markets more easily than smaller firms. If you purchased equal dollar amounts of each stock, you'd have a relatively cheap portfolio with a dividend yield greater than that of the S&P 500 and solid growth prospects. Not flashy or terribly creative, but I still think a portfolio of such relatively cheap large-cap stocks, with pretty limited downside potential and a surprisingly attractive return profile, looks like a pretty compelling value proposition in today's perilous market.

In investing, avoiding big losses matters just as much as generating adequate returns, and a portfolio of these types of stocks (with adequate diversification, of course) should be reasonably well-suited to getting you safely along the road ahead, while putting a little extra cash in your pocket at the same time. For all investors, especially those nearing retirement, safe feels a heck of a lot better than sorry.

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Fool contributor Andrew Tonner holds no financial position in any of the firms mentioned in this article. The Motley Fool owns shares of Philip Morris International, Wal-Mart Stores, Microsoft, Coca-Cola, Google, Cisco Systems, Johnson & Johnson, Apple, and Oracle. Motley Fool newsletter services have recommended buying shares of Philip Morris International, Pfizer, Wal-Mart Stores, Microsoft, Johnson & Johnson, Coca-Cola, Google, Apple, and Cisco Systems. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft; a bull call spread position in Apple; a diagonal call position in Johnson & Johnson; and a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (62)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 11, 2011, at 5:25 PM, mikecart1 wrote:

    These same stocks are talked about several times a week. I would like other less known stocks to be talked about like JNPR, SKUL, TOT, KMI, DNN, etc....

  • Report this Comment On October 11, 2011, at 5:25 PM, xetn wrote:

    The following seems to be a good analysis of AAPL since the death of Steve Jobs (no guarantees):

    http://lewrockwell.com/north/north1046.html

  • Report this Comment On October 11, 2011, at 8:38 PM, bobcollins wrote:

    I'm surprised IBM didnt make your list...

  • Report this Comment On October 11, 2011, at 11:40 PM, police12345 wrote:

    GMO aint no William Tell. and he sure ain't a FOOL, Be very careful, the EU is like a rubber band stretched to the breaking point, Watch out for the snap back when it breaks apart - the Tsunami effect may shake the free world's economies.

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