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LONDON -- The FTSE 100 is on a terrific bull run, finishing today's trading session at 6,529 points after soaring 16% in four months.
I don't think you necessarily have to back risky recovery stocks or speculative small caps to outperform the market if this bull run continues. I reckon three companies that are giants in their respective sectors should do well -- not perhaps delivering the outsize returns that some poorer-quality companies will notch up (if you can pick the right ones!), but returns ahead of the market all the same.
If the stock market bull run is to have real legs, it will require a truly improving economy. Stocks can't go higher indefinitely on sentiment alone. A global economic recovery will inevitably be allied to demand for resources in China and other industrializing countries. Step forward, mining giant BHP Billiton.
All miners had a poor 2012, dogged by weak prices and rising costs. But analysts are tentatively penciling in improving revenues and earnings going into 2014. In BHP Billiton's case, after it took an earnings hit of more than 40% during the first half of the current year, the City expects the decline to have moderated to about 30% by the company's June year-end.
For fiscal year 2014, the consensus is for BHP's earnings to rise about 30% -- and this forecast has been ticking up from where it was three months ago. At a current share price of about 2,100 pence, you're paying not much more than 10 times forecast FY 2014 earnings.
Valued by the market at more than 130 billion pounds, HSBC is more than three times the size of its nearest Footsie banking peer, Standard Chartered.
While the fortunes of Standard Chartered, Royal Bank of Scotland, Lloyds Banking, and Barclays are all -- to a greater or lesser degree -- tied to the economies of a single country or region, HSBC is a truly global giant with revenue well-balanced between Europe, the Americas, and the Asia-Pacific region. As such, HSBC is poised to thrive in a recovering world economy.
A current price-to-book value of 1.3 may not sound too attractive, but HSBC's net assets are forecast to increase rapidly over the next couple of years. If the group makes analyst estimates of 660 pence per share in net assets by the end of 2013 and the market ups its P/B rating to two (let's not forget the P/B was between 2.5 and three before the financial crisis), then HSBC's shares could trade at more than 1,300 pence compared withabout 725 pence today.
The reason why an asset manager such as Schroders can be expected to race ahead in a bull market is really quite simple. If Schroders can increase assets under management and keep the cost base low, the firm can then sit back and watch as management fees, profit, and the share price grow exponentially.
In a bull market, AUM enjoy a double turbo boost from optimistic investors ploughing money into the group's equity funds (causing the asset base to grow) and from the performance of the funds themselves (causing the value of the assets to grow). I reckon fair value for a quality fund-manager in an assets-growth phase is 3% of AUM. In its results for the year ended Dec. 31, Schroders reported AUM of 212 billion pounds, 3% of which is 6.36 billion pounds, or about 2,250 pence a share.
Schroders' voting shares are trading at 2,145 pence, and its non-voting shares (ticker: SDRC) trade at 1,715 pence -- below my fair value. Moreover, Schroders' AUM will have increased since Dec. 31 amid heavy fund inflows and a further rise in equity markets.
I've explained why BHP Billiton, HSBC, and Schroders should do well in a continuing bull market. What I can't tell you -- and what nobody can tell you -- is how far this bull market has left to run.
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